Budget-constrained expenditure multipliers
AbstractStandard expenditure multipliers capture economy-wide effects of new government projects only when financing constraints are not binding. In actual policy-making, however, new projects usually need financing. We show that under liquidity constraints, new projects are subject to two opposite effects: an income effect and a set of spending substitution effects. The former is the traditional, unrestricted, multiplier effect; the latter is the result of expenditure reallocation to uphold effective financing constraints. Unrestricted multipliers will therefore be, as a general rule, upward biased and policy designs based upon them should be reassessed in the light of the countervailing substitution effects. We also propose a novel decomposition of multiplier effects based on internal and external dependencies.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics Letters.
Volume (Year): 18 (2011)
Issue (Month): 13 ()
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Web page: http://www.tandfonline.com/RAEL20
Other versions of this item:
- Ana-Isabel Guerra & Ferran Sancho, 2010. "Budget Constrained Expenditure Multipliers," Working Papers 427, Barcelona Graduate School of Economics.
- Ana-Isabel Guerra & Ferran Sancho, 2010. "Budget Constrained Expenditure Multipliers," UFAE and IAE Working Papers 804.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
- C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
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- Manuel Alejandro Cardenete & Ferran Sancho, 2012.
"The Role Of Supply Constraints In Multiplier Analysis,"
Economic Systems Research,
Taylor & Francis Journals, vol. 24(1), pages 21-34, June.
- M. Alejandro Cardenete & Ferran Sancho, 2010. "The Role of Supply Constraints in Multiplier Analysis," UFAE and IAE Working Papers 805.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- M. Alejandro Cardenete and Ferran Sancho, 2010. "The Role of Supply Constraints in Multiplier Analysis," Working Papers 432, Barcelona Graduate School of Economics.
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