Fiscal multiplier/Tutorials: Difference between revisions
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Assessing the current size of fiscal multipliers | |||
is complex, in that the value taken depends on its composition, its permanent nature, and on the economic | |||
environment at large. The large majority of estimates of first-year spending multipliers in normal times are | |||
located in the range of 0.4 to 1.2. The values are lower – quite often below 0.7 - for tax multipliers. Therefore, if | |||
the composition of observed consolidation is taken as a guide, multipliers are expected in general to be lower | |||
than the highest estimates: using observed changes in revenues and expenditures to GDP ratios as proxies for the | |||
composition of the adjustment shows that in 2012 consolidation is equally shared in revenue and expenditure | |||
measures. In the same direction also go the indications that comes from the mostly permanent nature of the | |||
consolidation in the EU. | |||
However, it is likely that in the current juncture impact multipliers are higher than normal because 1) | |||
the literature stresses that in situations of crisis, and of financial crisis in particular, with many agents | |||
constrained in the financial markets, multipliers are larger than average; and 2) monetary policy is unable or | |||
unwilling to offset the deflationary effect of a consolidation | |||
Christine Romer has argued that that it is "incredibly hard" to estimate the value of a multiplier because fiscal actions are often taken in response to other things happening in the economy, and separating the impact of those other factors from the impact of fiscal change very difficult. Failure to do so can result in [[omitted-variable bias]] resulting in an underestimate of the multiplier - an error that Ms Romer believes to be common. | Christine Romer has argued that that it is "incredibly hard" to estimate the value of a multiplier because fiscal actions are often taken in response to other things happening in the economy, and separating the impact of those other factors from the impact of fiscal change very difficult. Failure to do so can result in [[omitted-variable bias]] resulting in an underestimate of the multiplier - an error that Ms Romer believes to be common. | ||
<ref>[http://ec.europa.eu/economy_finance/publications/economic_paper/2012/pdf/ecp460_en.pdf Jocelyn Boussard, Francisco de Castro and Matteo Salto: ''Fiscal Multipliers and Public Debt Dynamics in Consolidations'', European Commission, July 2012]</ref>. | |||
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<ref>[http://elsa.berkeley.edu/~cromer/Written%20Version%20of%20Effects%20of%20Fiscal%20Policy.pdf Christina D. Romer: ''What do we know about the effects of fiscal policy?'', Lecture at Hamilton College, November 7, 2011]</ref> | <ref>[http://elsa.berkeley.edu/~cromer/Written%20Version%20of%20Effects%20of%20Fiscal%20Policy.pdf Christina D. Romer: ''What do we know about the effects of fiscal policy?'', Lecture at Hamilton College, November 7, 2011]</ref> | ||
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