Gauging the multiplier: Lessons from history
Barry Eichengreen, Kevin Hjortshøj O’Rourke 23 October 2012
The size of the fiscal policy multiplier – and thus the impact of austerity on GDP – has been a contentious issue since the crisis started. The IMF recently revived the debate by suggesting that the multiplier is much higher than previously thought in the current policy environment. This column discusses independent empirical research that confirms the IMF’s view – the authors’ estimate of the multiplier is in the range of 1.6.
The IMF grabbed headlines and upset officials earlier this month when it released an analysis which concluded that, starting in 2009, the fiscal policy multiplier has actually been considerably larger than previously supposed (IMF 2012). The Fund’s new estimates, which range from 0.9 to 1.7, suggest that Europe’s policies of austerity are in fact directly responsible for the fact that the continent’s recessions have been even deeper than initially forecast.
We are shocked – shocked – to find that there’s multiplication going on in here.
Global crisis Macroeconomic policy
What is the size of the multiplier? An estimate one can’t refuse
Giancarlo Corsetti, Saverio Simonelli, Antonio Acconcia 04 April 2011
Few things divide the economics profession more than this question: How much economic activity does $1 of government spending generate? This column provides a new angle. Looking at local councils in Italy between 1990 and 1999, it examines variation in budgets due to the removal of funds by central government if mafia involvement is suspected. It finds that the fiscal multiplier starts at 1.4 and rises to 2.0.
How much more demand, output, and employment can we expect from expansionary fiscal stimulus? Conversely, how much macroeconomic pain can we expect from a contraction dictated by the need to keep public debt on a sustainable path? These questions have become most compelling during different phases of the recent global crisis (see Barro and Redlick 2009, Almunia et al.
Frontiers of economic research Macroeconomic policy
Italy, fiscal stimulus, multiplier, fiscal multiplier, mafia
Measuring the output responses to fiscal policy
Alan J Auerbach, Yuriy Gorodnichenko 03 September 2010
The return from a fiscal stimulus – the fiscal multiplier – remains one of the most controversial topics in economics today. This column considers the influence of expectations, of variation in recessions and expansions, and of different components of government spending. It finds that the size of the multiplier varies considerably over the business cycle: between 0 and 0.5 in expansions and between 1 and 1.5 in recessions.
The effect of fiscal policy on output – and its components – has long been a central part of fiscal policy analysis. And yet, as has been made clear by the recent debate over the likely effects of fiscal stimulus in the US and elsewhere, economists are a long way from reaching a consensus. Indeed economists remain divided over areas such as:
Global crisis Macroeconomic policy
fiscal policy, fiscal stimulus, global crisis, multiplier
How big are fiscal multipliers? New evidence from new data
Enrique G. Mendoza, Carlos A. Vegh , Ethan Ilzetzki 01 October 2009
How much stimulus does spending provide? This column says that fiscal multipliers are much weaker in countries that have high debt, lower income, flexible exchange rates, and greater international openness. Policymakers should consider these characteristics when evaluating the benefits of any fiscal stimulus package.
The economics profession did not and does not agree on one question that is critical in the evaluating governments’ responses to the crisis: How large is the stimulus impact of fiscal spending?
fiscal policy, global crisis, multiplier, fiscal multiplier
The fiscal stimulus debate: “Bone-headed” and “Neanderthal”?
Volker Wieland 31 March 2009
US economic advisers called for aggressive fiscal stimulus, and some support further measures. But many macroeconomists are not so sure. This column analyses fiscal stimulus using a New Keynesian model that exemplifies contemporary academic thinking on the subject. It says that the spending multiplier is much lower than the Obama administration’s estimates – government spending may quickly crowd out private consumption and investment.
fiscal policy, fiscal stimulus, multiplier
A lot of bucks, but how much bang?
Richard Clarida 16 March 2009
Policymakers have committed substantial sums to addressing the global recession and the global financial crisis, but there is real doubt about their effectiveness. This column explains why the fiscal stimulus might fail.
“We have involved ourselves in a colossal muddle, having blundered in control of a delicate machine, the workings of which we do not understand” - John Maynard Keynes, “The Great Slump of 1930”, published December 1930.
fiscal policy, global financial crisis, global crisis debate, stimulus, multiplier