Wednesday, July 1, 2009

A New Keynsian Multiplier Study

The will be lots of blogosphere comment about the study of spending multipliers by Cogan, Cwik, Taylor and Wieland. So, I will join in.

Before I comment, QM Theory is interested in the efficiency in which new government spending reaches useful products for the consumer. Absent any gains in efficiency, QM predicts the yield curve gets steeper and narrower. Mainly this is the effect of government goods piling up in inventory. The Fed, in response, would have to decide to either pull the plug with an interest rate hike; or continue the patterns of more quantitative easing to get interest to zero at 3 month and 1 year terms. The later course is hyper inflation as government contracts become increasingly expensive without limit.

An example of government goods piling up in inventory is the unsustainable medicare funding in which the unsustainability is represented by a backlog of medical transactions expected by the consumer at future dates.

Anyway, I think the New Keynsian model does incorporate yield curve effects, but it is still infinite dimensional so they include wage/price stickiness; the standard route to simulate a QM economy. In the QM model the expansion of government goods is followed by a yield curve adjustment to allocate the expense needed tfor final delivery of the goods. In over expansion the distrobution queue does not find a solution for final delivery and a reduction in equilibrium points occurs as the economy tries to down shift in the face of government expansion. Otherwise kown as the Treasury View.

I can give a summary now, but will return to this post. The summary is: Government needs to increase economies of scale before increasing spending.

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