The Fiscal Multiplier

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An IMF paper writes,

there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump.

Reading further, it turns out that some of the “evidence” consists of simulations of macroeconometric models, which I personally do not find convincing. Also, I would have liked to see more discussion of the the “monetary offset” issue.

The main point of the paper is that although the pre-crisis conventional wisdom was that discretionary countercyclical fiscal policy was not necessary, the post-crisis conventional wisdom is that it is a good idea. What I suggest in the book that I am writing is that this is normal in macroeconomics. That is, the conventional wisdom at time t always seems to be that the conventional wisdom at time t-1 is wrong. Yet if you think about what this model implies for the conventional wisdom at time t as viewed in time t+1, it is quite subversive.

Thanks to Timothy Taylor for the pointer.

5 thoughts on “The Fiscal Multiplier”

  1. I’ve never found the “fiscal multiplier” to be a very useful concept. It’s one of those things that only have meaning within the model in which it is defined but cannot be mapped to the real world in any useful way. The outcome being measured is too far downstream from the treatment that is supposedly causing that outcome. We’re better off trying to trace the effects of fiscal changes in the microdata–a difficult task but one that might actually increase our understanding of the economy rather than just give journalists and politicians a silly number to justify their policies preferences.

  2. That is, the conventional wisdom at time t always seems to be that the conventional wisdom at time t-1 is wrong.

    Hmmm. Is there any theory that is consistent with this observation for all time t?

    Why, yes. Yes, there is. Macroeconomics can’t make predictions.

  3. I always notice that fiscal multiplyers are only used in the (supposed) gov. spending/stimulus -> economie direction.

    As gov. must borrow or tax or inflate the money it spends, there must be an multiplyer effect too on the costs-for-society side. More tax/higher interset/higher inflation has negative effect on real economy, als with a multiplyer effect. Who knows it cancels out the stimulus or is even greater in negative sense?

  4. If there is anything to learn, it is how little thought goes towards what we haven’t recently experienced, and how we convince ourselves we understand what we do not. In this case about the zlb. That t-1 is wrong shouldn’t surprise anyone, nor that t is wrong, or that t+1 will be wrong, but they must converge or progress is an illusion. Learning is difficult when we have so few samples and so much changes between them, but to fail to learn only reinforces dogma.

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