In this note, we demonstrate and analyze the inability of standard neoclassical models to generate accurate estimates of the fiscal multiplier (that is, the macroeconomic response to increased government spending). We then examine whether estimates can be improved by incorporating recently...

Standard neoclassical models are unable to generate large values for the fiscal multiplier, the aggregate economic response to increased government spending. Empirical estimates place the multiplier between 0.7 and 1.0. Standard models deliver figures close to zero. In an earlier policy paper,...