On the Measurement of the Government Spending Multiplier in the United States: an ARDL Cointegration Approach

Abstract

This paper applies annual data from 1962 to 2011 to investigate the long run relationship between government spending and Gross Domestic Product (GDP). The common approach only considers defense government spending to estimate the multiplier to overcome the identification problem and endogeneity in isolating the effect of changes in government spending on GDP, I use the Autoregressive Distributed Lag (ARDL) approach to cointegration, which works despite having endogenous regressors to estimate the spending multiplier. The results confirm that government spending can be treated as a ‘long-run forcing’ variable for the explanation of real GDP and the long-run multiplier is found to be 1.94.