The Government Spending Multiplier in a Multi-Sector Model

We study the effects of aggregate government spending shocks in a New Keynesian economy with multiple interconnected production sectors that 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 sectoral heterogeneity\r\nin price rigidity. Aggregate government spending shocks also lead to heterogeneous responses of sectoral value added, with larger effects among upstream industries. We present novel empirical evidence supporting this prediction.