Department of "Huh?!"
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Menzie Chinn Causes Me to Raise My Estimate of the Multiplier

Menzie Chinn reviews fiscal multiplier estimates:

Econbrowser: Multiplier estimates, across countries, across states, across time: Today's two sessions -- one in the NBER's International Finance and Macro group and one in Monetary Economics -- included papers that tackled multipliers from a variety of directions. The general results indicated to me that, while multipliers are sometimes below unity, for conditions prevailing in the United States in 2011, they are typically above.

The first paper, by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, entitled "How Big (Small?) are Fiscal Mutlipliers?", too a cross country view....

[W]e find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero....

Why is the multiplier larger for countries fixed exchange rates? One interpretation, consistent with the Mundell-Fleming model (under high capital mobility) is that expansionary fiscal policy is more accommodated under pegged rates.... Paul Krugman has interpreted this finding as applying to the United States, to the extent that the Fed is pursuing an accommodative policy; and to the extent that we are at the zero interest rate bound for what appears to be indefinitely, given recent reports of economic weakness, that conjecture seems right to me. Another finding is that closed economies have larger multipliers.... So, ask yourself -- is the US a small country with the monetary authorities actively moving the interest rate around in order to respond to fiscal impulses; or is it better characterized as a large, relatively closed, economy with short interest rates at near zero. Then consider which results apply.

The next paper, by Emi Nakamura, and Jon Steinsson, entitled "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions", looked to intra-country data....

Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an open economy relative government spending multiplier of approximately 1.5.... The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our estimate "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks can have large effects on output....

Finally, in the last paper, Price Fishback, and Valentina Kachanovskaya go back in time, in "In Search of the Multiplier for Federal Spending in the States during the New Deal". From the abstract:

If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940.... The state per capita personal income multiplier with respect to per capita federal grants was around 1.1....

What I take from these papers' empirical results is that the proposition that multipliers are positive and (for government consumption and/or investments) in excess of unity, for conditions most applicable to the United States...

Let me note that I am not interested in state-level multipliers or in small open economy multipliers. If New York spends and Connecticut gets some of the benefit, that is absolutely fine with me. Leakages are not a big bug.

So the fact that leakage-ridden multipliers are above one is, I think, impressive evidence for the effectiveness of coordinated fiscal policy.

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