Talk:Fiscal multiplier

If MPC rises

If MPC rises , will the multipler get larger?

yes

Harry Potter and the Magic Multiplier

the multiplier is a big myth, it is built on entirely unfounded premises, ignores opportunity cost and by the estimates of keynesian economists themselves (see Bryant, Holtham and Hooper)using their own models drops to <1 after 2 years. Not to mention that nobody has actually measured it in real life. Even if we believed (yes faith is required in the absence of empirical evidence) that the logic behind the multiplier works, the effect of the negative multiplier when S is reduced makes it meaningless as far as policy implications go. The other irony is that the multiplier is often used to justify govt. intervention, and yet the keynesians own studies strongly suggest that there is a larger multiplier for private investment than for government spenditure. Funny ain't it?

-Also, don't forget that if consumers spend all of their income, then the multiplier will be infinite. As Murray Rothbard said, "Sure beats working!"

Criticism of the Multiplier effect

I think that the criticisms of this theory should be included in this article too. What do you think?

of course, like any hypothesis or theory, it cannot be presented as fact. Including some reference to contradictory theories and criticism is necessary. --Flix2000 19:47, 13 October 2006 (UTC)

The article states that "certain schools of laissez-faire which embrace Say's Law and deny the possibility of... under-employment of resources..." This is not strictly correct, but I'm having trouble re-wording it. These schools of laissez-faire do NOT deny the possibility of under-employment of resources, but I'm not really happy with just changing it to "under-employment of resources in equilibrium" or "persistent under-employment". Any suggestions? Even if consumers spend all their income the multiplier would never be infinite. At every economic transaction taxes are levied and represent a sink that in the end totals the original investment on one side, and on the other side prevent the multiplier (more correctly the original investment) from becoming infinite. That is why any investment by the government will sooner or later recovered in form of taxes. Solipso52 —Preceding unsigned comment added by 71.222.96.62 (talk) 02:43, 13 January 2008 (UTC)

- for an excellent summary of the fallacy of the Keynesian Spending multiplier see http://www.mises.org/books/dissent.pdf, pp. 77-79 (essay by Jeffrey Herbener)

The best bit: The multiplier (k) equals 1/1-MPC, and thus, he concluded, "it tells us that, when there is an increment of aggregate investment, income will increase by an amount which is k times the increment of investment" (ibid, [emphasis added]). To use k in support of "public works," the multiplier must have the mathematical precision Keynes gives it (ibid.: 116). Yet this precision leads to logical absurdities. Three absurd cases exist, corresponding to three violations of Keynes's pronouncement that 0 < MPC < 1. As shown above, there is no accounting principle that the MPC be bound in this way, and there is ample evidence that the MPC is not so bound (see Table 4.1). One absurdity exists when the MPC = 1 since, in this case, k is infinitely large. Thus, any additional expenditure on "public works" would end scarcity! Keynes tried to avoid this absurdity by claiming that "prices will rise without limit" (ibid.: 117). This was nothing but a rhetorical trick since Keynes had defined his theory in real terms (wage-units). If prices are important in his equations, then he should put them in and explain their role in the multiplier process. Keynes could not do that because his entire theory falls apart as soon as changing relative prices are recognized (Hazlitt [1959] 1973: 288- 318). Even more damaging is the case where the MPC exceeds one (see Table 4.1). In this case, the multiplier is negative!7 But Keynes claimed that more spending always means more prosperity, not less. The final case is no less absurd. If the MPC is negative (see Table 4.1), then k will be a positive fraction. Thus, an increase in spending for "public works" gets partially consumed somewhere in the aggregate economy. But Keynes claimed that failure to spend leads to recession. His formula does not concur, nor can it be reconciled with his verbal pronouncements. Keynesians cannot have it both ways: either they must give up mathematical precision (rendering the theory null) or they must reconcile these absurdities with general economic theory (not possible).

Should parts of this be included??

The MPC (for a country) is never going to reach 1 as VAT, duties or other purchase (or sales) taxes reduce the actual income at each stage. However, as you will see from the main article, it is possible for individuals to have an MPC higher than 1, but as the money "goes round" the overall MPC is less than 1.

20000miles (talk) 02:19, 7 January 2009 (UTC)

:-P

good job.. someone spelled arugment wrong

The name of this article should be Multiplier Effect.

I don't know why multiplier effect goes anywhere else. This is what it is supposed to be. Carlitos (talk) 20:56, 12 December 2008 (UTC)

The topic is treated in a very muddled way. 20000miles (talk) 02:27, 7 January 2009 (UTC)

Derivation

Show Derivation would be nicer. Jackzhp (talk) 21:48, 20 March 2009 (UTC)

Name change

The current article covers both the spending multiplier and tax multipliers. Together these are "fiscal multipliers," so I think we should change the page name to cover both. At this point, there's not enough material to make pages for both spending and tax multipliers, so splitting the article doesn't seem like a good solution. I would go ahead and move the article, but fiscal multiplier is a redirect to this page, so, assuming there's no opposition to the move, I'll get an admin to do the move.--Bkwillwm (talk) 05:04, 4 April 2009 (UTC)

 Administrator note Moved.--Aervanath (talk) 13:59, 31 May 2009 (UTC)

Definition shortcomings

The terms ΔY, ΔK and I in the equation in the Definition section are not defined. Without any definition of the terms, the equation is pretty much useless. Unfortunately, I don't know the definition, so I cannot expand on it. --Dolda2000 (talk) 02:15, 17 April 2009 (UTC)

The definition, as it stood, was completely incoherent, so I moved it. In general, fiscal multipliers and other sorts of multipliers refer to the ratio ΔY/ΔX, where Y is a macroeconomic aggregate (frequently GDP) and X is some exogenous (unexplained) quantity of spending. Sometimes X represents private-sector consumption, and then the multiplier refers to what happens to the rest of the economy if for some reason consumption rises. More frequently, it refers to an increase in government spending. Unfortunately, depending on the theory under discussion, exactly what is being held fixed and what is being allowed to vary when calculating the ratio ΔY/ΔX, may be completely different. --Rinconsoleao (talk) 14:45, 1 June 2009 (UTC)

Should separate the general analysis from the Keynesian analysis

This page is hard to follow, and the topic is hard to define precisely, because the term 'fiscal multiplier' is used in very different types of economic models and theories. It would be helpful to give a general definition of the meaning of the term, and then have a large subsection on the meaning of the term in Keynesian economics.

In general, a fiscal multiplier refers to how much some endogenous macroeconomic variable (such as GDP) responds to an exogenous change in some fiscal variable (such as government spending). There are many possible combinations of endogenous and exogenous variables one might want to analyze, so there are many possible multiplier formulas (as this page makes clear). This is the usual meaning of 'multiplier' in economics, and in a static model it is derived by comparative statics analysis. In a dynamic model there are still more possible meanings: it may refer to the immediate impact of the exogenous variable on the exogenous variable, or the long run impact, or also on some medium run impacts; the general topic forms part of impulse reponse analysis.

However, the fiscal multiplier is most closely associated with Keynesian theory (most nonspecialists only hear about 'fiscal multipliers' in some Keynes-related chapter of a macroeconomics textbook), and Keynesians have defined the concept in a somewhat nonstandard way. Often it refers to the change in GDP in response to some fiscal variable in the Keynesian cross diagram. In that case, it (usually) represents the effect of the fiscal variable on GDP holding fixed interest rates and investment and many other variables. The total effect in the Keynesian cross diagram can also be interpreted as how much the IS curve shifts right in the IS-LM diagram. These Keynesian interpretations are actually what the formulas on this page refer to.

How all this stuff fits into macroeconomic theory would be much clearer if the page attempted to separate the concept of a fiscal multiplier in general from the Keynesian concept of a fiscal multiplier. Alternatively, this page could be moved to Keynesian multiplier or Keynesian fiscal multiplier. --Rinconsoleao (talk) 14:59, 1 June 2009 (UTC)

A classic reference: Marianne Baxter and Robert King (1993), 'Fiscal policy in general equilibrium'. American Economic Review 83 (3), pp. 315-334.

A recent summary: A. Spilimbergo, S. Symansky, and M. Schindler (2009), 'Fiscal multipliers'. IMF Staff Papers SPN/09/11.

Another summary: Christophe Kamps (2004), The Dynamic Macroeconomic Effects of Public Capital: Theory and Evidence for OECD Countries. Springer, ISBN 3540238972. --Rinconsoleao (talk) 08:07, 2 June 2009 (UTC)