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The Role of Supply Constraints in Multiplier Analysis

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  • M. 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 an extensions have been developed that exploit its informational content. Nonetheless there are some implicit theoretical assumptions whose implications have perhaps not been fully assessed. This is the case of the 'excess capacity' assumption. Because of this assumption resources are available as needed to adjust production to new equilibrium states. In real world applications, however, new resources are scarce and costly. Supply constraints kick in and hence resource allocation needs to take them into account to really assess the effect of government policies. Using a closed general equilibrium model that incorporates supply constraints, we perform some simple numerical exercises and proceed to derive a 'constrained' multiplier matrix that can be compared with the standard 'unrestricted' multiplier matrix. Results show that the effectiveness of expenditure policies hinges critically on whether or not supply constraints are considered.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 805.10.

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Length: 21
Date of creation: 22 Feb 2010
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Handle: RePEc:aub:autbar:805.10

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Keywords: Key sectors; Economic linkages; Policy evaluation; Economy-wide modeling; General equilibrium.;

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References

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  1. Ana-Isabel Guerra & Ferran Sancho, 2010. "Budget Constrained Expenditure Multipliers," Working Papers 427, Barcelona Graduate School of Economics.
  2. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1993. "What do governments buy?," CEMA Working Papers 513, China Economics and Management Academy, Central University of Finance and Economics.
  3. 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.
  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. Kehoe, Timothy J & Polo, Clemente & Sancho, Ferran, 1995. "An Evaluation of the Performance of an Applied General Equilibrium Model of the Spanish Economy," Economic Theory, Springer, vol. 6(1), pages 115-41, June.
  6. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, April.
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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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