American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Simple Analytics of the Government Expenditure Multiplier
American Economic Journal: Macroeconomics
vol. 3,
no. 1, January 2011
(pp. 1–35)
(Complimentary)
Abstract
This paper explains the key factors that determine the output multiplier of government purchases in New Keynesian models, through a series of simple examples that can be solved analytically. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary policy response. A multiplier well in excess of one is possible when monetary policy is constrained by the zero lower bound, and in this case welfare increases if government purchases expand to partially fill the output gap that arises from the inability to lower interest rates. (JEL E12, E23, E32, E62, H20, H50)Citation
Woodford, Michael. 2011. "Simple Analytics of the Government Expenditure Multiplier." American Economic Journal: Macroeconomics, 3 (1): 1–35. DOI: 10.1257/mac.3.1.1JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E62 Fiscal Policy
- H20 Taxation, Subsidies, and Revenue: General
- H50 National Government Expenditures and Related Policies: General
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