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Budget Constrained Expenditure Multipliers

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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," UFAE and IAE Working Papers 804.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  • Handle: RePEc:aub:autbar:804.10
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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. 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.
    3. repec:sdo:regaec:v:26:y:2017:i:2_7 is not listed on IDEAS

    More about this item

    Keywords

    Government multipliers; fiscal stimulus; expenditures substitution effects;

    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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