The Government Spending Multiplier in a Multisector Economy

Abstract

We study the effects of aggregate government spending shocks in a production network economy where sectors differ in their price rigidity, factor intensities, use of intermediate inputs, and contribution to final demand. The model implies an aggregate value-added multiplier that is 75 percent (and $0.32) larger than that obtained in the average one-sector economy. This amplification is mainly driven by input–output linkages and—to a lesser extent—sectoral heterogeneity in price rigidity. Aggregate government spending shocks also lead to heterogeneous responses of sectoral value added, which are larger among upstream industries. We present novel empirical evidence supporting this prediction. (JEL E12, E16, E23, E43, E52, E62, H50)

Gauging the effects of the German COVID-19 fiscal stimulus package

“…RoT households also maximize (1) for i r with respect to labor supply subject to their real CPI-deflated budget constraint Due to the multi-sector structure, we need to derive how much of aggregate consumption and investment spending X t tC t , I t u is channeled towards each sector z Z. We follow Bouakez et al (2020) and assume that households' consumption and investment goods preferences across all Z sectors in our economy are given by…”

“…To determine the labor and capital supply that goes to each sector z Z of our model economy, assume that perfectly competitive, representative labor and capital agencies hire the total amount of labor N t at the real wage w t and rent the total amount of capital K t at the real rate r k t , selling it in turn to intermediate goods producers operating in Z different sectors (see also Bouakez et al, 2020). It is assumed that labor/capital input cannot perfectly move across sectors, so that…”

“…They may be shocked and follow an AR(1) process, where Exp,z t denotes the export shock. Following Bouakez et al (2020) and defining aggregate output as gross value added, we get…”

“…Substitution elasticities for goods produced in the different sectors are set as follows. With 0.5 for the (government) consumption and investment baskets, we choose similar values to the ones of Bouakez et al (2020). For the intermediate inputs, we also follow Bouakez et al (2020) and Atalay (2017), by setting a value of 0.1.…”

“…With 0.5 for the (government) consumption and investment baskets, we choose similar values to the ones of Bouakez et al (2020). For the intermediate inputs, we also follow Bouakez et al (2020) and Atalay (2017), by setting a value of 0.1. Concerning the substitution elasticities of labor and capital, Bouakez et al…”