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Expansive fiscal policy in times of crisis thrives on the idea of ​​the multiplier: that a debt-financed increase in government spending leads to an increase in gross domestic product that is above the level of the increase in government spending. But there is bad news for Old Keynesians - a new study by two American economists raises doubts that this will work and thus casts doubt on the usefulness of expansionary fiscal policies in the crisis.

“I change my mind all the time. That is the exciting part of being in economic research and studying the economy. You always see new people coming up with new ideas. It would be boring — frustrating — if there were all this good new work that was coming up and you did not change your mind and did not learn anything ”
Harald Uhlig


In our FAZIT interview with Rüdiger Bachmann, the multiplier known from ancient Keynesian theory played an important role. Bachmann reported on empirical work according to which the amount of the multiplier depends on the economic situation and the multiplier can reach a value of around two in a crisis, which would make expansionary fiscal policy effective. The macroeconomist, who teaches at the University of Notre Dame, also referred to a current empirical work that had different results based on other statistical methods.

This study, written by Valerie A. Ramey and Sarah Zubairy, is now available as a working paper published by the American National Bureau of Economic Research (NBER). Indeed, Ramey / Zubairy are rather ungracious about other recent research.

The two authors use figures from the United States that go back to 1889 as a database.

Their main result is: The amount of the multiplier is largely independent of the economic situation. The multiplier is between 0.6 and 1. This means that not much can be expected from expansionary fiscal policy in the crisis. This applies not only to the traditional case of a weak economy, but also to the special case that the interest rate is at zero.

Is this the last round in the dispute over the correct statistical method?

We want to add that these studies are about the effect of a debt-financed increase in government spending. There is, however, another way in which a state accepts new borrowing in order to finance tax cuts instead of government spending. The chains of effects are then different, because falling taxes can also have positive supply effects. Apparently nothing new has existed since research by Christina Romer & David Romer (2010) on this topic1) And, according to the authors' admission, this study, too, did not lead to firm conclusions: "Similarly, our results do not speak to the issue of whether taxes are a more powerful tool of fiscal policy than government purchases."

In conclusion, it should be noted that fiscal policy has been analyzed much less often than monetary policy in recent years. Those interested in a lively debate on fiscal policy should refer to the transcript of a controversial discussion at the American Economic Association's annual meeting in early 2013 in San Diego. Participants were Valerie Ramey, Paul Krugman, Harald Uhlig and Carlo Cottarelli. The panel was moderated by Brad DeLong, who published the transcript on his blog.


1) I would be grateful for tips on new work that is unknown to me.

Keywords: Christina Romer, David Romer, fiscal policy, Harald Uhlig, multiplier, Paul Krugman, Rüdiger Bachmann, national debt, Valerie Ramey
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Dispute over the multiplier

From Gerald Braunberger

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