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Re-Evaluating The Keynesian Multiplier: Critiques And Evidence From Europe

Enrico Gabriele
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Enrico Gabriele: LUMSA University

No wpC21, CERBE Working Papers from CERBE Center for Relationship Banking and Economics

Abstract: This paper starts from Keynes’ General Theory to demonstrate the existence of a non-linear Keynesian multiplier on the grounds of cross-country data. Thus, we prove the effectiveness of short-run countercyclical exogenous stimuli during downturns. The role of fiscal spending is discussed in light of different schools of thought, including the well-known “expansionary fiscal contraction” theory. Moreover, we examine the European fiscal rules of convergence – aimed to sovereign debt sustainability – that affect the size of “fiscal space”. Empirical data from several Eurozone countries provide evidence of traditional multipliers. Furthermore, the Greek economy displays a non-linear case of multiplier. This leads to rejecting the assumption of a weak Keynesian setting, which supported instead the IMF-backed fiscal contraction.

Keywords: Keynesian Multiplier; Expansionary Fiscal Contraction; Euro Sovereign Crisis (search for similar items in EconPapers)
JEL-codes: E12 E17 E61 E63 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pke
Date: 2017-08
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