This means we can have far lower taxes for any given amount of govt spending.

Hope they all see it that way!

Friday, May 21, 2010

The Administration and the IMF on the Multiplier
In a soon to be published paper, several economists at the International Monetary Fund report estimates of government spending multipliers which are much smaller than those previously reported by the U.S.

Administration. In order to obtain the estimates the IMF economists use a very large complex model called the Global Integrated Monetary and Fiscal (GIMF) Model developed by Douglas Laxton and his colleagues at the IMF . The paper is quite technical, but the bottom line summary is that a one percent increase in government purchases (as a share of GDP) increases GDP by a maximum of 0.7 percent and then fades out rapidly. This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.

The IMF estimate is much less than the multiplier reported in a paper released last year by Christina Romer of the President’s Council of Economic Advisers and Jared Bernstein of the Vice President’s Office. The attached graph shows how huge the difference is. It shows the impact on GDP of a one percentage point permanent increase in government purchases as a share of GDP reported in the IMF paper (labeled GIMF) and in the Administration paper (labeled Romer-Bernstein).

John Cogan, Volker Wieland, Tobias Cwik and I raised questions about Romer-Bernstein paper soon after it was released last year because the estimates seemed to be much different from comparable estimates based on more modern new Keynesian models. We classified the Romer-Bernstein estimates as old Keynesian. Since then many technical papers have been written on this subject, of which a recent paper by Michael Woodford is the most comprehensive in my view. The IMF model is of the new Keynesian variety and adds more evidence of the huge policy differences between new Keynesian and old Keynesian models.

Posted by John B. Taylor at 12:48 AM

10 Responses

  1. Interesting. Can the differences between old and new models be summed up in a brief statement? If not, please point me to a resource where I could find details on this.
    Thanks.

    1. Hello? Is there something between my teeth? :-/
      Someone please post response to question above.

      Is this better 😀

      thank you

      1. Jill,
        I think Ramanan is opining that it may be a waste of time to look into these reports any further…

        This quote is where they lose me: “This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.”

        Looks like a dead end right there to me, as I dont believe in “crowding out” by govt spending. In his intro comment, I think Warren is focused on lowering the govt taxes side of the govt ops that I believe can destroy GDP/wealth.

        Recommend check this one out from Prof Mitchell that goes over how the austerity/paygo that people like Taylor are in a deceptive way advocating for would ruin the non-govt sector (thats us!). I thought the simple closed household business card analogy at the end of the post was enlightening (at least for me).

        http://bilbo.economicoutlook.net/blog/?p=7864#more-7864

        Resp,

      2. Matt: This quote is where they lose me: “This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.”

        Exactly. Keynes is essentially demand side and New Keynesianism is essentially supply side. The NK argument is that deficit spending “crowds out” investment, and this is just bogus. If they have constructed a model “proving” it, you can be sure it is based on assumptions selected for this purpose, i.e., it’s ideological propaganda in support of a policy agenda. Investment is in the tank because of lack of investment opportunity, due to weak demand, not government spending, which is supporting whatever demand there is while the private sector deleverages.

  2. Please advise or share a link to facts concerning policy differences between new Keynesian and old Keynesian models. Your President has spoken. lol

  3. so far all the nk’s i’ve met aren’t all that smart and I can’t bring myself to read anything they write unless i’m pressed to do it.

    and, of course, they don’t understand monetary operations or reserve accounting.

    so they think low multipliers are ‘bad’ because they think high deficits are ‘bad’ and they’d rather use a high multiplier solution because the deficit will be lower. etc.

    bunch of morons.

    1. bunch of morons.

      Ha ha, that’s pretty harsh. After all, they’re pretty good at moving the goalposts… and that takes a certain kind of cleverness. :o)

      Now many economists, including Dean Maki at Barclays Capital (BCS), 2006 Nobel Prize winner Edmund Phelps, and Bank of America Merrill Lynch’s (BAC) Ethan Harris, think the financial crisis has pushed the U.S.’s natural rate of unemployment to between 6.3 and 7.5 percent.
      http://www.businessweek.com/print/magazine/content/10_24/b4182012718823.htm

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