Fiscal Multipliers and Bank Dividers

Written by Professor Jagjit Chadha Wednesday, 28 November 2012 18:07
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Jagjit Chadha is a Professor of Economics at the University of Kent.


He is co author of the recently published The Euro in Danger


Fiscal multipliers are pretty hard to estimate as they tend not to be particularly stable.  Which is another way of saying that the impact on output of a given change in fiscal policy – which we can define as the planned path of government expenditures and tax receipts over some appropriate planning horizon - depends on a very large number of factors for which it is nearly impossible to condition.   
A non-exhaustive list for fiscal policy might include the extent to which the fiscal expansion is expected, credible, temporary or financed by changes in spending or taxes, as well as the debt instruments issued.  The estimated response of the economy will depend how firms, households and banks respond to the changes in fiscal policy but also may be complicated by the response of these same agents to the same shock to which fiscal policy is responding.  The responses of other policy makers such as central bank responses to any fiscal policy and that of other fiscal authorities, particularly in a monetary union, will further complicate any attempts to estimate a clean partial.
I illustrated some of these issues in a talk to St Catherine’s Political Economy seminar last month.  One early piece of evidence was simply a Table of recent estimates of the multiplier for the UK.  The estimates from these sources give a wide variety depending also on the way in which the fiscal stance is changed.  The outlier in these estimate are those recently derived by the IMF in the October 2012 WEO (Box 1.1), who used the negative residual (where actual output turns out to be below the forecast) of output forecasts from 2010-11 to find some correlation between the timing of fiscal consolidation and the continuing underperformance of the economy.   It turns out though that although the IMF paper tries to apply many controls, they do control for the impact of household and bank deleveraging
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