Sunday, March 27, 2011

Will The Real Multiplier Please Stand Up?

In the past few weeks in my macro classes, we have talked about the government spending multiplier. But not all economists agree on what the numerical value of the multiplier is. See Much ado about multipliers: Why do economists disagree so much on whether fiscal stimulus works? from "The Economist" magazine in Sept. 2009. Here is an excerpt:
"Different assumptions about the impact of higher government borrowing on interest rates and private spending explain wild variations in the estimates of multipliers from today’s stimulus spending. Economists in the Obama administration, who assume that the federal funds rate stays constant for a four-year period, expect a multiplier of 1.6 for government purchases and 1.0 for tax cuts from America’s fiscal stimulus. An alternative assessment by John Cogan, Tobias Cwik, John Taylor and Volker Wieland uses models in which interest rates and taxes rise more quickly in response to higher public borrowing. Their multipliers are much smaller. They think America’s stimulus will boost GDP by only one-sixth as much as the Obama team expects."

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