Table 3: Multiplier associated with net tax increases

|Quarters|1|4|8|12|20|Peak|
|---|---|---|---|---|---|---|
||Model w<br>|ith exogen<br>|ous factor<br>|s<br>|||
|Impact multiplier|-0.32*|-0.15*|-0.06|-0.01|0.07|-0.32*(1)|
|Govt. spending|-0.10*|-0.05*|-0.01|0.02|0.03||
|Net tax revenue|1.00*|0.46*|0.16*|0.05|0.01||
|Cumulative multiplier|-0.32*|-0.33*|-0.34*|-0.33*|-0.24*|-0.34*(9)|
||Model w|ithout exo|genous fac|tors|||
|Impact multiplier|-0.35*|-0.10*|0.16*|0.36*|0.59*|-0.35*(1)|
|Govt. spending|-0.10*|-0.07*|-0.07|-0.06|-0.05||
|Net tax revenue|1.00*|0.82*|0.65*|0.55*|0.46*||
|Cumulative multiplier|-0.35*|-0.25*|-0.09*|0.06*|0.36*|-0.35*(1)|

Notes: Each panel of this table provides the multiplier associated with a one-dollar increase in net tax revenue in the first quarter. The first and fourth rows represent the impact multiplier and the cumulative multiplier, respectively at each quarter. The multiplier given here are the median and * denotes that 0 does not belong to the confidence region. The second and third quarters represent the response of government spending and net tax revenue. The last column reports the maximum multiplier (in absolute value) and numbers in brackets denote the quarter in which the maximum is observed.

# **3.3.1 Sub-period government spending multiplier**

Table 4 reports the multiplier associated with a one-dollar increase in government purchases within the first quarter over both sub-periods. The results suggest that the impact of a government spending shock on GDP tends to be larger in the second sub-period than in the first sub-period. Within the first quarter, GDP increases by $0.4 in the first sub-period, while it increases by $0.70 in the second. The maximum effect for the impact multiplier is achieved upon impact for the first sub-period, while it is achieved with a short delay of two quarters in the second sub-period and equal to $0.92.

For the cumulative multiplier, the maximum effect is equal to $0.66 in the first sub-period, while it is equal to $1.09 in the second. However, both effects are achieved after a long delay. Several quarters after the shock, tax revenue falls faster in the second sub-period than in the first sub-period. The persistent response of government spending coupled with this large drop in tax revenue may contribute to the larger impact of a government spending shock on output in the second sub-period.

The higher spending multiplier post 1990 suggests that, on the one hand, the rapid globalization may have played a little role in reducing the effectiveness of government spending in Canada. On the other hand, the inflation targeting regime associated with more effective capital expenditure could have been determinant. Indeed, after 1990, the Canadian economy was characterized by lower: inflation, interest rate and volatility compared to the period before the inflation targeting. The high confidence of the private sector in such environment may have helped to mitigate the crowding-out effect of government spending. Also, it is possible that public investment which is theoretically associated with higher multiplier than recurrent expenditures was more effective in stimulating the economy in 14