(Not) Dancing Together : Monetary Policy Stance and the Government Spending Multiplier

This paper provides estimates of the government spending multiplier over the monetarypolicy cycle. We identify government spending shocks as forecast errors of the growth rateof government spending from the Survey of Professional Forecasters (SPF) and from theGreenbook record. The state of monetary policy is inferred from the deviation of the U.S.Fed funds rate from the target rate, using a smooth transition function. Applying the localprojections method to quarterly U.S. data, we find that the federal government spendingmultiplier is substantially higher under accommodative than non-accommodative monetarypolicy. Our estimations also suggest that federal government spending may crowd-in orcrowd-out private consumption, depending on the extent of monetary policy accommodation.The latter result reconciles—in a unified framework—apparently contradictory findings inthe literature. We discuss the implications of our findings for the ongoing normalization ofmonetary conditions in advanced economies.