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

American Journal of Social and Management Science, Vol. 1, No. 1, pp. 24-38, September 2010

15 Pages Posted: 25 Jun 2009 Last revised: 26 Feb 2011

See all articles by Lonnie K. Stevans

Lonnie K. Stevans

Hofstra University - Frank G. Zarb School of Business

David N. Sessions

Frank G. Zarb School of Business

Date Written: September 21, 2010

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

Suggested Citation

Stevans, Lonnie K. and Sessions, David N., Calculating and Interpreting Multipliers in the Presence of Non-Stationary Time Series: The Case of U.S. Federal Infrastructure Spending (September 21, 2010). American Journal of Social and Management Science, Vol. 1, No. 1, pp. 24-38, September 2010, Available at SSRN: https://ssrn.com/abstract=1424446

Lonnie K. Stevans (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

Department of IT/QM
134 Hofstra University
Hempstead, NY 11549
United States
516-463-5375 (Phone)

HOME PAGE: http://www.lonniestevans.com

David N. Sessions

Frank G. Zarb School of Business ( email )

Hempstead, NY 11549
United States
516-463-5719 (Phone)

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