Transcript L5 multipliersx - Harvard Kennedy School

LECTURE 5:
KEYNESIAN MULTIPLIERS
AND THE TRANSFER PROBLEM
• The multiplier for an increase in 𝐴,
e.g., due to a fiscal expansion.
• The multiplier for an increase in 𝑋,
e.g., due to a devaluation.
• The Transfer Problem,
e.g., due to a unilateral transfer 𝑇.
Review of multiplier
NS  I  X  M
+
Keynesian model of S + M
AXM
Y 
sm
=>
where 𝐴 ≡ 𝐶 + 𝐼 + 𝐺.
Fiscal Multiplier
1
Y 
A
sm
open-ec. multiplier = 1/(s+m) < 1/s
ΔTB  ΔM  - m Y
m

ΔA .
sm
17.1
Fiscal
multiplier
𝑨 ↑, e.g., due to fiscal stimulus: 𝑮 ↑.
“Twin deficits”:
ΔG leads to both a fiscal deficit & trade deficit (US in 1980s & 2001-07).
But if the exogenous rise is ΔI, BD & TD move opposite directions (US in 1990s).
Example: EU fiscal austerity has been contractionary.
Source: P.Krugman, 10 May 2012,
Worried about endogeneity of fiscal contraction”? See Appendix 1
AXM
Y 
sm
Export multiplier
1
Y 
X
sm
ΔTB  ΔX  m Y
s

ΔX  ΔX .
sm
Note misprint in Equation (17.11), 10th ed. of WTP.
17.2
Export
multiplier
𝑿 ↑, e.g., due to a devaluation: 𝑬 ↑.
ΔE shifts the X-M line up by Δ𝑿, the elasticities answer.
But the rise in TB is partially offset by higher imports.
The Transfer Problem
The question: If one country makes a unilateral transfer
ΔT to the other, does the recipient buy enough goods
from the transferor so that the latter’s ΔTB
• falls short of the transfer ?
=> ΔTB - ΔT < 0
=> “transfer is under-effected”
• exceeds the transfer ?
=>
=> “transfer is fully effected”
CA ↓ .
=> ΔTB - ΔT > 0
=> “transfer is over-effected”
• equals the transfer ?
=>
=>
CA ↑ .
ΔTB - ΔT = 0
=>
ITF-220- Prof.J.Frankel, Harvard Kennedy School
ΔCA = 0 .
Historical examples: Applications of the transfer problem
Transferor Recipient Where appears
________ ________ in the BoP__
1871 - Reparations after
Franco-Prussian war
France
1919 - Reparations
after World War I
Germany France
Unilateral
transfer
1947 - Marshall Plan
after World War II
United
States
Transfers +
loans (KA)
1974 - Exogenous rise
in price of oil
Oil
OPEC
importers
1982 - Exogenous
rise in interest rates
Debtor
Creditor
countries countries
Interest
payments
Kuwait,
United
SA, Japan… States
Unilateral
transfers
1991 - Payments
after 1st Iraq war
Germany
Western
Europe
Unilateral
transfer
Merchandise
tradebalance
The US TB improved in the late 1980s,
due to $ depreciation and especially, in 1990-91, US recession.
The current account even went into surplus briefly in early 1991.
Why? Transfers received from Kuwait, Saudi Arabia, et al.
FIGURE 17.3
ITF-220- Prof.J.Frankel, Harvard Kennedy School
End of Lecture 5:
Keynesian Multipliers
and
the Transfer Problem
in a Small Country
ITF-220- Prof.J.Frankel, Harvard Kennedy School
Appendix 1: EU fiscal austerity
The bigger the fiscal contraction, the bigger the GDP loss
relative to what had been officially forecast
=> true multipliers > than multipliers that IMF had been using.
Europe: Growth Forecast Errors vs. Fiscal Consolidation
Forecasts
Source: Olivier
Blanchard &
Daniel Leigh, 2014,
“Learning about Fiscal
Multipliers from Growth
Forecast Errors,”
fig.1, IMF Economic
Review 62, 179–212.
Note: Figure plots forecast error for real GDP growth in 2010 and 2011 relative to forecasts made in the spring of
2010 on forecasts of fiscal consolidation for 2010 and 2011 made in spring of year 2010; and regression line.