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Budget Constrained Expenditure Multipliers

Author

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  • Ana-Isabel Guerra
  • Ferran Sancho

Abstract

We 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.

Suggested Citation

  • Ana-Isabel Guerra & Ferran Sancho, 2010. "Budget Constrained Expenditure Multipliers," Working Papers 427, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:427
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    File URL: https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/427.pdf
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    Citations

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    Cited by:

    1. 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.
    2. Pilar Campoy-Muñoz & Manuel Alejandro Cardenete & María del Carmen Delgado & Ferran Sancho, 2021. "Food Losses and Waste: A Needed Assessment for Future Policies," IJERPH, MDPI, vol. 18(21), pages 1-11, November.
    3. M. Alejandro Cardenete & M. Carmen Lima & Ferran Sancho, 2017. "A multiplier evaluation of primary factors supply–shocks," Working Papers 17.01, Universidad Pablo de Olavide, Department of Economics, Quantitative Methods and Economic History.
    4. Ferran Sancho & Ana-Isabel Guerra & Betty Agnani, 2023. "An index of static resilience in interindustry economics," UFAE and IAE Working Papers 972.23, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. FUENTES-SAGUAR, Patricia D. & MAINAR-CAUSAPE, Alfredo J., 2017. "A Social Accounting Matrix approach to appraise sectors with a zero deficit public budget," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., vol. 26(2), pages 89-96.

    More about this item

    Keywords

    Government multipliers; fiscal stimulus; expenditures substitution effects;
    All these keywords.

    JEL classification:

    • 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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