In a soon to be published paper, several economists at the International Monetary Fund report estimates of government spending multipliers which are much smaller than those previously reported by the U.S. Administration. In order to obtain the estimates the IMF economists use a very large complex model called the Global Integrated Monetary and Fiscal (GIMF) Model developed by Douglas Laxton and his colleagues at the IMF . The paper is quite technical, but the bottom line summary is that a one percent increase in government purchases (as a share of GDP) increases GDP by a maximum of 0.7 percent and then fades out rapidly. This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.This doesn't make government spending look good or all that useful. Something that supporters of increased government spending in face of the financial crises will have trouble explaining. After all their whole argument was based on a large government multiplier.
Thursday, 27 May 2010
The IMF on the multiplier
Matt Nolan has been talking about Fiscal policy camps over at TVHE. Given this discussion let me add this from John Taylor's blog Economics One: