Multipliers are the key to economic success

Tell me the multiplier for fiscal expansion and I will tell you if the US or any country will have a strong recovery. That simple number is the key to our economic future. Everyone learned abut the multiplier effect in their macroeconomics 101 class so the answer to the question should be very straightforward. Unfortunately, there is a major problem with what is the multiplier. We have CEA head Romer suggest that it is 1.6, though her research suggests that it is highly variable. Robert Barro has argued that the number is 0. There is no positive long-term impact from the stimulus package.

We know that the multiplier will be different for temporary versus permanent changes and the impact will also differ based on whether it increases consumption or is made as an investment. The current research from the Voxeu.org website is not promising. Some of their findings are below.

New evidence from new data

Data has long been the big hurdle to obtaining precise estimates of fiscal multipliers. In CEPR Policy Insight No. 39, we present our estimates of the fiscal multipliers for developed and emerging economies using new quarterly data for 45 countries (20 high-income and 25 developing) spanning 1960 through 2007. Using this, we estimated fiscal multipliers for different groups of countries.¹ The main results are presented in more detail in our Policy Insight. Here is a brief summary of the highlights:

• The response of output to increases in government spending is smaller on impact and considerably less persistent in developing countries than in high-income countries.
• Fiscal multipliers are much larger in economies operating under predetermined exchange rate regimes than under flexible exchange rates.
• Relatively closed economies have much larger multipliers than relatively open economies.
• The output response to increases in government spending is short-lived and much less persistent in highly indebted countries than in countries with a low debt to GDP ratio.
• The multipliers for the US in the post-1980 period are small both in the short and long-run. On the other hand, multipliers for government investment are large.

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These simple questions are the ones which require the most work yet are often relegated to truisms.