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The Role Of Supply Constraints In Multiplier Analysis

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  • Manuel Alejandro Cardenete
  • Ferran Sancho

Abstract

Multiplier analysis based upon the information contained in Leontief's inverse is undoubtedly part of the core of the input--output methodology and numerous applications and extensions have been developed that exploit its informational content, both at the national and regional levels. Nonetheless there are some implicit theoretical assumptions whose policy implications need to be assessed. This is the case for the ‘excess capacity’ assumption, which implies that resources are available as needed to adjust production to new equilibrium states. In an actual economy, however, new resources are often scarce and always costly. When supply constraints intervene, the assessment of the effects of government demand policies may be substantially different from that of the standard Leontief multiplier matrix. Using a closed general equilibrium model that incorporates supply constraints, we perform some simple numerical exercises and proceed to derive two ‘constrained’ multiplier matrices, based upon the implicit Jacobian matrix, that can be compared with the standard ‘unconstrained’ Leontief matrix.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Economic Systems Research.

Volume (Year): 24 (2012)
Issue (Month): 1 (June)
Pages: 21-34

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Handle: RePEc:taf:ecsysr:v:24:y:2012:i:1:p:21-34

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  1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521319867, 9.
  2. Ana-Isabel Guerra & Ferran Sancho, 2010. "Budget Constrained Expenditure Multipliers," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 804.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Timothy J. Kehoe & Clemente Polo & Ferran Sancho, 1994. "An evaluation of the performance of an applied general equilibrium model of the Spanish economy," Working Papers, Federal Reserve Bank of Minneapolis 480, Federal Reserve Bank of Minneapolis.
  4. Diamond, J, 1974. "The Analysis of Structural Constraints in Developing Economies: A Case Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 36(2), pages 95-108, May.
  5. Pyatt, Graham, 1985. "Commodity Balances and National Accounts: A SAM Perspective," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 31(2), pages 155-69, June.
  6. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1993. "What do governments buy?," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 513, China Economics and Management Academy, Central University of Finance and Economics.
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Cited by:
  1. Miguel Vélez, Francisco Javier de & Llop Llop, Maria & Manresa, Antonio, 1954-, 2013. "Supply Multipliers in Two Regional Economies," Working Papers 2072/213636, Universitat Rovira i Virgili, Department of Economics.
  2. Miguel, Francisco Javier de & Llop Llop, Maria & Manresa, Antonio, 1954-, 2011. "Simulating the Impact of Sectorial Productivity Gains on Two Regional Economies: Key Sectors from a Supply Side Perspective," Working Papers 2072/169681, Universitat Rovira i Virgili, Department of Economics.

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