Budget-constrained expenditure multipliers

Ana-Isabel Guerra and Ferran Sancho

Applied Economics Letters, 2011, vol. 18, issue 13, 1259-1262

Abstract: Standard expenditure multipliers capture economy-wide effects of new government projects only when financing constraints are not binding. In actual policy-making, however, new projects usually need financing. We show that under liquidity constraints, new projects are subject to two opposite effects: an income effect and a set of spending substitution effects. The former is the traditional, unrestricted, multiplier effect; the latter is the result of expenditure reallocation to uphold effective financing constraints. Unrestricted multipliers will therefore be, as a general rule, upward biased and policy designs based upon them should be reassessed in the light of the countervailing substitution effects. We also propose a novel decomposition of multiplier effects based on internal and external dependencies.

Date: 2011
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Related works:
Working Paper: Budget Constrained Expenditure Multipliers (2015)
Working Paper: BUDGET CONSTRAINED EXPENDITURE MULTIPLIERS (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:18:y:2011:i:13:p:1259-1262

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DOI: 10.1080/13504851.2010.532101

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