Paul Krugman on the Fiscal Multipliers
Why Oh Why Can't We Have a Better Press Corps? (Washington Post Strikes Again Edition)

Fiscal Policy Multipliers

Ummm... No. This is not good:

Greg Mankiw's Blog: Monetary vs Fiscal Policy: [M]uch of the short-run stimulus effect of fiscal policy comes about because it induces a monetary expansion. This monetary expansion is automatic if the Fed is holding the interest rate fixed or if it is following something like a Taylor rule, which is approximately what it is doing now. The effects of fiscal policy would be very different if the Fed were holding the money supply constant in response to a fiscal change.... One way to answer this question is to look at the fiscal-policy multiplier. In chapter 11 of my intermediate macro text, I give the government-purchases multiplier from one mainstream econometric model. If the nominal interest rate is held constant, the multiplier is 1.93. If the money supply is held constant, the multiplier is 0.60. If the LM curve were completely vertical, the second number would be zero...

The Federal Reserve today does not react to a fiscal expansion by increasing the money stock. The Federal Reserve today reacts to a fiscal expansion by raising interest rates and contracting liquidity so as to try to still hit its inflation target. As Larry Meyer said once, "if you don't know that the Fed has been targeting a 2% CPI inflation rate, you simploy haven't been paying attention."

These days, except in exceptional circumstances--in a liquidity trap, when interest rates are already so low that the Fed can't or daren't lower them further, or when the fiscal expansion comes as a sudden surprise that the Fed does not have time to immediately offset--fiscal policy has next to no stimulative effect at all because the Federal Reserve takes steps to make sure that it does not. That's the big reason that claims in 1993 that the Clinton tax increases were going to send the economy into recession were wrong.

We do our students no good service if we teach them that in today's economy, in normal times outside of a liquidity trap, expansionary fiscal policy "creates jobs" in even a temporary and ephemeral sense.

UPDATE: Greg Mankiw writes:

It might be worth pointing out to your readers that the example I was discussing, raised by the question from Bryan Caplan, was the WWII fiscal expansion. Maybe you guys think the Fed was targeting Y at Y* back then, but I doubt it.

The only thing I said about the current situation is that the Fed is following something like a Taylor rule. This is hardly a radical idea: it dates back to Taylor himself.