TY - JOUR
T1 - Budget-constrained expenditure multipliers
AU - Guerra, Ana Isabel
AU - Sancho, Ferran
PY - 2011/9/1
Y1 - 2011/9/1
N2 - 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. © 2011 Taylor & Francis.
AB - 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. © 2011 Taylor & Francis.
U2 - https://doi.org/10.1080/13504851.2010.532101
DO - https://doi.org/10.1080/13504851.2010.532101
M3 - Article
VL - 18
SP - 1259
EP - 1262
JO - Applied Economics Letters
JF - Applied Economics Letters
SN - 1350-4851
ER -