Some Amendments to the Algebraic Representation and Empirical Estimation of the Fiscal Multipliers

Ahmed Mehedi Nizam

MPRA Paper from University Library of Munich, Germany

Abstract: Conventional algebraic estimate of the fiscal multipliers ignores the concept of velocity of money and mistakenly assumes that money changes hands an infinite number of times during a given year while we know money only has a finite velocity. Apart from the velocity of money, fiscal multipliers tend to depend on average propensity to consume and average propensity to import of the economy as a whole and also on average tax rate among other things which are not reflected in the modern SVAR based estimation. Here, in the first place, we amend the algebraic definition of the fiscal multipliers considering the impact of velocity of money, provide a micro-foundation relating fiscal multipliers with money velocity and other macro variables and later propose a modification in the conventional SVAR set up by incorporating aforesaid macro variables arranged in a logical manner. Proposed amendments to the SVAR set up entail relatively stable estimates of the fiscal multipliers as can be seen from empirical estimation of the multiplier values for US and UK data during the period 1972-2018.

Keywords: fiscal multipliers; money velocity; government spending multipliers; average propensity to consume; average propensity to import; average tax rate (search for similar items in EconPapers)
JEL-codes: E62 H3 H50 (search for similar items in EconPapers)
Date: 2020-11-25
New Economics Papers: this item is included in nep-mac and nep-pbe
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