Budget Constrained Expenditure Multipliers
AbstractWe show that standard 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. 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 upheld 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.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 427.
Date of creation: Feb 2010
Date of revision:
Government multipliers; fiscal stimulus; expenditures substitution effects;
Other versions of this item:
- 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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- 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).
- Manuel Alejandro Cardenete & Ferran Sancho, 2012. "The Role Of Supply Constraints In Multiplier Analysis," Economic Systems Research, Taylor and Francis Journals, vol. 24(1), pages 21-34, June.
- 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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