The Role of Supply Constraints in Multiplier Analysis

Manuel Alejandro Cardenete and Ferran Sancho

No 432, Working Papers from Barcelona School of Economics

Abstract: Multiplier analysis based upon the information contained in Leontief's inverse is undoubtedly part of the core of the input-output methodology and numerous applications an extensions have been developed that exploit its informational content. Nonetheless there are some implicit theoretical assumptions whose implications have perhaps not been fully assessed. This is the case of the 'excess capacity' assumption. Because of this assumption resources are available as needed to adjust production to new equilibrium states. In real world applications, however, new resources are scarce and costly. Supply constraints kick in and hence resource allocation needs to take them into account to really assess the effect of government policies. Using a closed general equilibrium model that incorporates supply constraints, we perform some simple numerical exercises and proceed to derive a 'constrained' multiplier matrix that can be compared with the standard 'unrestricted' multiplier matrix. Results show that the effectiveness of expenditure policies hinges critically on whether or not supply constraints are considered.

Keywords: Key sectors; Economic linkages; Policy evaluation; Economy-wide modeling (search for similar items in EconPapers)
JEL-codes: C63 C68 D58 (search for similar items in EconPapers)
Date: 2015-09
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: THE ROLE OF SUPPLY CONSTRAINTS IN MULTIPLIER ANALYSIS (2012)
Working Paper: The Role of Supply Constraints in Multiplier Analysis (2010)
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