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Government stimulus spending and the multiplier

“Our research shows no evidence of a Keynesian ‘multiplier’ effect.” So, says Harvard professor Robert J.Barrow, who together with Charles J.Redlick, wrote a piece in The Wall Street Journal last Thursday. According to Barrow and Redlick, government stimulus packages are predicated on the view that expenditure multipliers are greater than one. To estimate these potential multiplier values they examined US defence spending during wartime periods.


They conclude by saying: “The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.” To see their article click here.


Nobel prizewinner, Paul Krugman, responded in The New York Times, by arguing that what happened during wartime tells us very little about what would happen under current conditions. He says: “…during World War II there, um, was a war on: consumption goods were rationed, construction required special permits, and so on. The government was, in other words, deliberately suppressing private spending, through direct controls. So WWII is not a useful data point for determining what the multiplier is under other conditions.” To see his article click here.

An interesting article on this area has just been published by Ilzetski et al which offers a wide range of multipliers depending on a country’s situation. According to the authors: “Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well-served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.”


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Posted in Fiscal stimulus, government spending, Multiplier Effect

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