Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages. The simple expenditures multiplier measures the change in aggregate production triggered by changes an autonomous expenditure, such as investment expenditures or government purchases. 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. Government expenditure multiplier under the zero lower bound. Journal of political economy,2011 available from the lms 20. 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. In other words, it measures how gdp increases or decreases when the government increases or decreases spending in the economy. Simple analytics and empirics of the government spending. E24,e62,h3 abstract factor supply increases depresses output for many of the same reasons that the government. Eggertsson 2011 and christiano, eichenbaum, and rebelo 2011 study the effect of fiscal policies at the. Journal of political economy,2011 available from the lms 2. 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.
In other words, an initial change in the total demand for goods and services what economists term aggregate demand causes a change in total output for the economy that is a. 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. Pdf the fiscal multiplier and the government debt laffer curve. This paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a. Keynes investment multiplier is simple and static in which income depends upon consumption and investment. Modeling macroeconomic policymakers interactions under zero. Published in volume 3, issue 1, pages 5 of american economic journal. Jun 17, 20 the spending multiplier is closely related to the multiplier effect.
Simple analytics of the government spending multiplier. 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. Woodford 2011 considers the government expenditure multiplier in a similar environment. Michael woodford columbia university january 1, 2010 abstract this paper explains the key factors that determine the e. Keynesian government spending multipliers and spillovers in the. However, we show that this multiplier is large in economies in which the output cost associated with the zerobound problem is more severe. Simple analytics of the government expenditure multiplier federal. Output response to government spending federal reserve bank. Simple analytics and em pi rics of the government spendin g multiplier and other keynesian paradoxes, the b.
Simple analytics of the government expenditure multiplier by michael woodford. Simple analytics of the government expenditure multiplier. Simple analytics of the government expenditure multiplier january 2010. Under zirp, the central bank maintains a 0% nominal interest rate. Simple analytics of the government expenditure multiplier created date. The size of the government spending and tax multiplier. Understanding the size of the government spending multiplier. The multiplier effect is exploited by governments attempting to use fiscal stimulus policies to increase the general level of economic activity. 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. Simple analytics of the government expenditure multiplier, nber working paper 15714. Government spending multipliers and the zero lower bound. Simple analytics of the government expenditure multiplier nber. The government expenditure multiplier is shown in fig.
Modeling macroeconomic policymakers interactions under. This work incorporates productive government expenditure in a simple borrowersaver model to analyze how the presence of debt constrained agents affects the value of the multiplier when two types of government expenditure are considered. 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. Feb 01, 2010 a large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates.
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. This increased debt would be interpreted as promised future taxes. This paper explains the key factors that determine the output multiplier of government purchases in new keyn. Simple analytics of the government expenditure multiplier michael woodford columbia university new approaches to fiscal policy frb atlanta, january 89, 2010. 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. Pdf code and data files for public investment, time to. Government expenditure multiplier the quantitative effect of a shane in government expenditure on real gdp. Government, expenditure, tax and balanced budget multiplier. Where mpc is the marginal propensity to consume and mps is the marginal propensity to save if, for example, the mpc is 0. Michael woodford, simple analytics of the government expenditure multiplier, american economic journal, vol.
Simple analytics of the government expenditure multiplier, american economic journal. 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. Any government expenditure is actually income of households in the form of wages, interest, rent and profit. 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. Chap 11 expenditure multipliers flashcards quizlet. Macroeconomics, american economic association, vol. Users who downloaded this paper also downloaded these. The government spending multiplier, fiscal stress and the.
It has begun again in the united states since march 15, 2020. Increased spending by government increases the rate of. 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 expenditure multiplier in the simple keynesian model is a result of induced consumer expenditures. We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. Investment, government purchases, taxes, and net exports through imports are also induced. Christiano, eichenbaum and rebelo when is the government spending multiplier large. Department of economics spring 2014 economics g6216. Bullard emphasizes that monetary stabilization policy has been quite effective, even while the. Lecture 2a reloc 160210 multipliers and output models. 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. 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. Government expenditure multiplier under the zero lower.
The response of future government purchases also peaks after a short delay, indicating that the typical government. The key to the simple expenditures multiplier, however, is that consumption expenditures and only consumption expenditures are induced by changes in aggregate. 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. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary. Simple analytics of the government expenditure multiplier core. Models of government expenditure multipliers sebastian dyrda. 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. This can be done in a period of recession or economic uncertainty, when unemployment of labor is high and other resources are underutilized. This paper explains the key factors that determine the output multiplier of government purchases in new keynesian models, through a series of. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in. 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. A simple method to compute fiscal multipliers international. 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. Simple analytics of the government expenditure multiplier by.
The spending multiplier is closely related to the multiplier effect. Simple analytics and empirics of the government spending multiplier and other keynesian paradoxes casey b. The simple expenditures multiplier assumes that consumption is the only induced component. The exact value of the governmentspending multiplier depends on a variety of factors. After keynes, in order to make the multiplier more practical, economists included a number of variables to construct many. The keynesian expenditure multiplier the keynesian model.
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, nber working papers 15714, national bureau of economic research, inc. It is calculated as the change in real gdp that results from a change in government expenditure divided by he change in government expenditure. The presentation is organized around three key relationships. In the real world, however, consumption is not the only induced expenditure. Prepared for the session fiscal stabilization policy at the meetings of the allied social science associations atlanta georgia january 35 2010. A government spends money towards the supply of goods and. The simple models discussed above suggest that the multiplier can be large in the zerobound state. Public investment projects typically entail significant timetobuild delays, which often span several years from. Pdf the fiscal multiplier and the government debt laffer.
However, shifting the taxes into the future can undo most or all of the benefits that might otherwise come from the fiscal stabilization program. Department of economics spring 2014 columbia university. Simple analytics of the government expenditure multiplier, cepr discussion papers 7704, c. To assess the usefulness of government expenditure as a fiscal tool, we need to. Simple analytics of the government expenditure multiplier michael woodford columbia university new approaches to fiscal policy frb atlanta, january 89, 2010 woodford columbia analytics of multiplier january 2010 1 41.
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