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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Tuesday, October 06, 2009

Fiscal stimulus actually has a negative impact on an econmy in many cases.....

From here. The graphic representation of the actual impact is can be seen below....

And there is some bad news for the ability of the US government to apply fiscal stimulus as commented on here...
For the US, we find the impact multiplier is 0.64 and the long-run cumulative multiplier is 1.19. While these estimates are certainly closer to Romer’s than to Barro’s, they mask some important structural changes over the sample period. When estimating the multipliers for the pre-1980 period, we get considerably larger numbers than the post-1980 multipliers. The post-1980 multipliers are just 0.32 on impact and 0.4 in the long-run. This is certainly a far cry from the impact multiplier (1.05) and long-run multiplier (1.55) used in the Romer report.
Who knows why this is the case? I suspect that it is difficult to 'fool' the markets with fiscal spending since essentially what is going on is that the government is taking from one group of people through taxes or borrowing and spending it on another group of people and not achieving anything.

Basically, it says that if one is in a floating exchange rate environment, such as in the US, one cannot expect much gain from fiscal stimulus. And as the researchers have concluded.....

Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well-served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.
It just seems to make sense that it is difficult to get something going from nothing. Other things are impacted negatively to balance out the impacts of the short-term stimulus.


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