Unpacking the Multiplier: Making Sense of Recent Assessments of Fiscal Stimulus Policy

Abstract

POLICYMAKERS ACROSS THE GLOBE RESPONDED DIFFEREN TLY TO Great Recession, som e w ith harsh austerity, others w ith activ­ ist income support and jo b grow th strategies. This diversity offers a good laboratory to assess relative m erits o f stim ulus and austerity responses. Much o f answ er depends on values o f the m ulti­ plier—the ratio o f change in GDP to resources expended due to policy (that is, how much increases in government spending or decreases in taxes affect GDP). Ever since Keynes (1936) m ade m ultiplier a cornerstone o f analysis laid out in The General Theory of Employment, Interest, and Money, it has been standard shorthand for discussing im pact o f exogenous shocks o f various kinds to macroeconomy. This is true even for those whose vision o f m acroeconom y is very different from that o f Keynes. For instance, Real Business Cycle theorists often express their position that government spending will not affect level o f output by arguing that government spending multiplier has a low or zero value. For better or worse, discourse over fiscal policy seems destined to be undertaken in vocabulary o f multiplier. W hile it is not su rprisin g that assessm en ts o f stim ulus policy should center around m ultiplier, it m ay well be undesirable. The