Monday, February 22, 2010

Barro on the spending multiplier

From his piece in the Wall Street Journal:
I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. Thus, if the government spends an extra $300 billion in each of 2009 and 2010, GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010.
When one factors in the typical relationship between tax rates and tax revenue, the multiplier is around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion.
Few economists think that the velocity of money is stable enough to predict with any accuracy what would happen if the money stock increased by10%. Why should the multiplier be any more predictable?

Update: More here and here.

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