An essential dilemma in economics that has yielded ambiguous answers is whether governments should spend more in recessions. This paper provides an extension of the work of Ramey & Zubairy (2018) for the US economy according to which the government spending multipliers are below unity, especially when the economy experiences severe slack. Nonetheless, their work suffered from some limitations with respect to invertibility and weak instrument problem. The contribution of this paper is twofold: Firstly, it provides evidence that a triple lasso approach for the lag selection is a useful tool in removing the invertibility issues and the weak instrument problem. Secondly, the main results using a triple lasso approach suggest multipliers below unity for most cases with no evidence for differences between different states of the economy. Nevertheless, re-running the code in Ramey & Zubairy (2018), the case where WWII is excluded exhibits multipliers above unity, in both the military news and Blanchard-Perotti specifications, contradicting their baseline findings and providing evidence for a more effective government spending in recessions.
The Rise and Fall of Unproductive Activities in the US Economy 1964–2015: Facts, Theory and Empirical Evidence
