The Government Spending Multiplier in a Multi-Sector Economy
- American Economic Journal: Macroeconomics (Forthcoming)
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 dollars) 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.
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