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Budget-constrained expenditure multipliers

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  • Ana-Isabel Guerra
  • Ferran Sancho

Abstract

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. 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.

Suggested Citation

  • Ana-Isabel Guerra & Ferran Sancho, 2011. "Budget-constrained expenditure multipliers," Applied Economics Letters, Taylor & Francis Journals, vol. 18(13), pages 1259-1262.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:13:p:1259-1262
    DOI: 10.1080/13504851.2010.532101
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    Cited by:

    1. Betty Agnani & Ana Isabel Guerra & Ferran Sancho, 2023. "An index of static resilience in interindustry economics," ThE Papers 23/09, Department of Economic Theory and Economic History of the University of Granada..
    2. 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.
    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. 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.
    5. 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.

    More about this item

    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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