Thursday, March 25, 2010

Menzie reads 200 pages so we don't have to

Stimulus multipliers according to probability based equilibrium models and the like

Multipliers compare overall GDP increases and legislature spending increase, with varying amounts of low interest rates from the Central Banker. These stimulus multipliers look very similar to what I get using empirical results comparing stimulus to GDP via the Ceridian. Read Menzies take.

My take:

When legislatures suddenly spend large amounts at the bottom of a downturn they are likely to use up constrained resources, just as Keynes said.

Once the economy figures out the game, then it compensates and the multiplier drops from 1.0 down as agents manage to stop or modify the sudden spending splurge.

Why do legislatures do this in a downturn? Dunno, I would have preferred we use less of the constrained resources or else wait to see what government can do to remove constraints.

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