Budget Constrained Expenditure Multipliers

Ana-Isabel Guerra and Ferran Sancho

No 427, Working Papers from Barcelona School of Economics

Abstract: We show that 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. 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 upheld 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.

Keywords: Government multipliers; fiscal stimulus; expenditures substitution effects (search for similar items in EconPapers)
JEL-codes: C67 H61 (search for similar items in EconPapers)
Date: 2015-09
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Related works:
Journal Article: Budget-constrained expenditure multipliers (2011)
Working Paper: BUDGET CONSTRAINED EXPENDITURE MULTIPLIERS (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:427

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