Keynes Theory: Fiscal Multipliers

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Keynes theory Fiscal multipliers are defined as the effect of a one dollar change in fiscal policy, either a one dollar increase in spending or a one dollar decrease in tax revenues, on GDP. In other words, fiscal multipliers are the ratio of a change in GDP to a one dollar change in fiscal policy (IMF paper). There is no agreement among the literature regarding the size and the significance of the fiscal multipliers as the findings concerning the fiscal multipliers significantly differ across the literature. Mineshima, Poplawski-Ribeiro and Weber (2014) summarize the findings of 41 studies and find that the one-year spending multiplier among the surveyed literature averages around 0.75 and the one-year tax multiplier amounts to 0.25. Leeper, Traum and Walker (2015) study the effect of government spending on…show more content…
The authors conclude that the fiscal consolidation increases confidence in the private sector, resulting in a positive impact on private consumption and consequently resulting in a real GDP growth. Hellwig and Neumann (1987) criticize that the proponents of the Keynesian theory take only the direct impact of fiscal policies into consideration, but not the indirect impact via the expectation channel. Changes in expectations due to a fiscal constriction have a positive impact on GDP because companies and consumers anticipate lower taxes and lower interest rate in the future (demand channel), stimulating the economy and hence resulting in a higher GDP. According to Hellwig and Neumann, the favourable effect of the fiscal consolidation only outweighs the negative effects of the reduced government spending in the medium run if the attempt of a government to decrease the debt is credible. (crowding out private spending => services that could be offered by private companies is provided by governments, government spending replaces private

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