Simple analytics of the government expenditure multiplier core. Government, expenditure, tax and balanced budget multiplier. Journal of political economy,2011 available from the lms 20. Jul 14, 2010 the multiplier effect or spending multiplier refers to the idea that an initial amount of government spending leads to a change in the activity of the larger economy. This can be done in a period of recession or economic uncertainty, when unemployment of labor is high and other resources are underutilized. We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. However, we show that this multiplier is large in economies in which the output cost associated with the zerobound problem is more severe. The keynesian expenditure multiplier the keynesian model. Pdf the fiscal multiplier and the government debt laffer curve. The keynesian expenditure multiplier is the number by which a change in aggregate expenditures must be multiplied in order to determine the resulting change in total output. The simple models discussed above suggest that the multiplier can be large in the zerobound state. Michael woodford, simple analytics of the government expenditure multiplier, american economic journal, vol. More generally, the exogenous spending multiplier is the ratio of change in national income arising from any autonomous change in spending including private investment spending, consumer spending, government spending, or.
In other words, it measures how gdp increases or decreases when the government increases or decreases spending in the economy. The multiplier effect is exploited by governments attempting to use fiscal stimulus policies to increase the general level of economic activity. Keynes investment multiplier is simple and static in which income depends upon consumption and investment. Investment, government purchases, taxes, and net exports through imports are also induced. Department of economics spring 2014 economics g6216. Simple analytics of the government expenditure multiplier nber. Government expenditure multiplier under the zero lower bound. A simple model for comparing flexible and sticky price outcomes the economic mechanisms behind the government spending multiplier and other keynesian paradoxes can be illustrated in a variant of the sidrauski 1967 model without capital. Pdf code and data files for public investment, time to. This paper explains the key factors that determine the output multiplier of government purchases in new keyn. Sticky prices or wages allow for larger multipliers than in a neoclassical. The multiplier effect or spending multiplier refers to the idea that an initial amount of government spending leads to a change in the activity of the larger economy. Journal of political economy,2011 available from the lms 2. Modeling macroeconomic policymakers interactions under.
Published in volume 3, issue 1, pages 5 of american economic journal. Department of economics spring 2014 columbia university. Keynesian government spending multipliers and spillovers in the. Woodford 2011 considers the government expenditure multiplier in a similar environment. The government spending multiplier, fiscal stress and the. This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in new keynesian models, through a series of simple examples that. This paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a. Eggertsson 2011 and christiano, eichenbaum, and rebelo 2011 study the effect of fiscal policies at the. In economics, the fiscal multiplier not to be confused with the money multiplier is the ratio of change in national income arising from a change in government spending. Multiplier is equal to 1 dy t dg t this is woodfords simple analytics of the government expenditure multiplier aej macro 2011 what happens in a aiyagaribewley environment. Pdf the fiscal multiplier and the government debt laffer. It has begun again in the united states since march 15, 2020. Public investment projects typically entail significant timetobuild delays, which often span several years from.
Understanding the size of the government spending multiplier. Jun 17, 20 the spending multiplier is closely related to the multiplier effect. E24,e62,h3 abstract factor supply increases depresses output for many of the same reasons that the government. Modeling macroeconomic policymakers interactions under zero. However, shifting the taxes into the future can undo most or all of the benefits that might otherwise come from the fiscal stabilization program. Whilst the model might be regarded as simple it does give some idea of the forces that drive the multiplier concept and is therefore valuable. A more complete, more realistic, and more complex multiplier includes induced components. Government expenditure multiplier under the zero lower. The size of the government spending and tax multiplier. Any government expenditure is actually income of households in the form of wages, interest, rent and profit.
A simple method to compute fiscal multipliers international. Simple analytics and empirics of the government spending. Simple analytics and em pi rics of the government spendin g multiplier and other keynesian paradoxes, the b. Michael woodford columbia university january 1, 2010 abstract this paper explains the key factors that determine the e. Simple analytics of the government expenditure multiplier by michael woodford this paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a series of simple examples that can be solved analytically. Simple analytics of the government expenditure multiplier federal. Simple analytics of the government expenditure multiplier michael woodford columbia university new approaches to fiscal policy frb atlanta, january 89, 2010. The exact value of the governmentspending multiplier depends on a variety of factors. Simple analytics of the government expenditure multiplier january 2010. This paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a series of simple examples that can be solved analytically. To assess the usefulness of government expenditure as a fiscal tool, we need to. Simple analytics of the government expenditure multiplier, nber working paper 15714.
Users who downloaded this paper also downloaded these. The spending multiplier is closely related to the multiplier effect. Where mpc is the marginal propensity to consume and mps is the marginal propensity to save if, for example, the mpc is 0. Macroeconomics, american economic association, vol. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in. Government expenditure multiplier the quantitative effect of a shane in government expenditure on real gdp.
Chap 11 expenditure multipliers flashcards quizlet. Lecture 2a reloc 160210 multipliers and output models. Michael woodford columbia university june, 2010 abstract this paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a series of simple examples that can be solved analytically. The simple expenditures multiplier measures the change in aggregate production triggered by changes an autonomous expenditure, such as investment expenditures or government purchases. Output response to government spending federal reserve bank. The spending multiplier, or fiscal multiplier, is an economic measure of the effect that a change in government spending and investment has on the gross domestic product of a country. We do so in the context of a tractable newkeynesian economy in which a fraction of government spending increases the stock of public capital subject to a timetobuild constraint. Simple analytics of the government spending multiplier. Under zirp, the central bank maintains a 0% nominal interest rate. The simple expenditures multiplier assumes that consumption is the only induced component. Woodford simple analytics of the government expenditure multiplier aej. Simple analytics of the government expenditure multiplier by michael woodford. Government spending multipliers and the zero lower bound.
This article summarizes the simple analytics of the macroeconomic effects of government budget deficits. Simple analytics of the government expenditure multiplier by. Bullard emphasizes that monetary stabilization policy has been quite effective, even while the. Feb 01, 2010 a large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates.
Zero interestrate policy zirp is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary japan and december 2008 through december 2015 in the united states. The response of future government purchases also peaks after a short delay, indicating that the typical government. After keynes, in order to make the multiplier more practical, economists included a number of variables to construct many. This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in new keynesian models, through a series of simple examples that can be solved analytically. The presentation is organized around three key relationships. Christiano, eichenbaum and rebelo when is the government spending multiplier large. The government expenditure multiplier is shown in fig. The multiplier is maximised if the new enterprise takes on previously unemployed workers, it is minimised if it takes on people who commute in from outside the area. Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers pensions, social benefits and capital transfer. Prepared for the session fiscal stabilization policy at the meetings of the allied social science associations atlanta georgia january 35 2010. Simple analytics of the government expenditure multiplier, nber working papers 15714, national bureau of economic research, inc. Increased spending by government increases the rate of.
In the real world, however, consumption is not the only induced expenditure. Simple analytics of the government expenditure multiplier, american economic journal. This paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a series of. Simple analytics of the government expenditure multiplier. Simple analytics and empirics of the government spending multiplier and other keynesian paradoxes casey b. A government spends money towards the supply of goods and. The expenditure multiplier in the simple keynesian model is a result of induced consumer expenditures. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary. It is calculated as the change in real gdp that results from a change in government expenditure divided by he change in government expenditure. Simple analytics of the government expenditure multiplier, cepr discussion papers 7704, c. The key to the simple expenditures multiplier, however, is that consumption expenditures and only consumption expenditures are induced by changes in aggregate. This increased debt would be interpreted as promised future taxes. The zirp is an important milestone in monetary policy because the central bank is typically no longer able to reduce nominal interest ratesit is at the zero lower bound. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages.