Calculating and Interpreting Multipliers in the Presence of Non-Stationary Time Series: The Case of U.S. Federal Infrastructure Spending

Abstract

In this analysis, we discuss two measures that have been used by economists to measure changes in macroeconomic policies: the dynamic multiplier and the impulse response function. These multipliers are identical under specific conditions, e.g., by imposing certain restrictions on a VAR model. However, in the presence of variables, if the multipliers/impulse responses are generated from a VAR model, there can be substantial biases at both the long and short-run horizons and the idea of multipliers would have to be reevaluated in the environment of time series that exhibit hysteresis. In this paper, the influence that infrastructure spending will have on U.S. economy from 2009 to 2010 is examined by modeling selected macroeconomic variables as a Vector Error Correction (VEC) model. The impulse response function will then be used to generate government spending multipliers and bootstrapped confidence intervals. Findings indicate a Federal infrastructure spending multiplier of 3.33 at the end of a two year period.

Keywords: dynamic multiplier, impulse response function, Vector Error Correction (VEC), Vector Autoregressive (VAR)

JEL Classification: E62, H54, C32