Menzie Chinn and Knzn on Multipliers
Menzie Chinn writes:
Econbrowser: A Pocketful of Multipliers: knzn... had an interesting post the other day on "The Indirect Effects of Export Demand"... he notes:
Today let us be thankful for multiplier and accelerator effects. And in any case let us at least be aware of multiplier and accelerator effects. In particular, if you want to talk about the potential role of export demand in preventing a US recession, the story you tell should mostly be about multiplier and accelerator effects rather than direct effects. If you tell the story without mentioning multiplier and accelerator effects, the prospect looks pretty dismal...
He continues with a nice discussion of the basics of the Keynesian multiplier in an economy without taxes (approximately) and without a financial sector (or one at least with a flat LM curve).
A little quick Keynesian arithmetic should make the point. Let's suppose that the marginal propensity to consume is 0.7.... The total effect of that hypothesized 1 percentage point contribution from export growth becomes 3.3 percentage points. Suddenly I'm glad the actual export contribution is unlikely to be that high: I wouldn't want the Fed to have to raise interest rates dramatically to prevent overheating.
I think it's very useful to have these rules-of-thumb handy to cross-check the many assertions that fly around. At the same time, one often wishes for rules-of-thumb that control for other effects... transactions based crowding out... leakage [pdf] due to the fact that the marginal propensity to import is probably around 0.10... repercussion effects... accelerator effect.... A lot of stuff to keep in mind, even for back of the envelope calculations.
So in the spirit of better informing our debates on what is likely to happen, I invite people to contribute their estimates of multipliers (or where they've found listings of multiplers). I'll start off the process with the ones I've found useful: from the OECD's Interlink model (documented in this working paper by Dalsgaard, Andre and Richardson (2001)).
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If you work out the units in which this is measured in, it's sort of analogous to the simple real dollar for real dollar change multipliers....
A couple of caveats. As PGL pointed out in a previous post on multipliers, the Interlink model has a few odd assumptions built in (or at least built into the simulations used to generate the implied multipliers). So the implied multipliers from Macroeconomic Advisers, and the other econometric models, would be welcome. (And if anybody's got a credit crunch multiplier, well that would be very interesting...
Disclaimer: I know that for anybody who's received an economics PhD in the past 20 years, this post is hopelessly old-fashioned. But, even those who learned the econometric policy evaluation critique (a.k.a., "the Lucas critique") in their first year of studies remember that if the policy changes are not drastic, then the multipliers (convolutions of the correlations) will still be informative. For those schooled in the last ten years, they are even more likely to dismiss the entire discussion. But to the extent the DSGEs in use now are calibrated to mimic the dynamics of these macroeconometric models, well, think of these multipliers as super-ad hoc approximations.
