Rethinking Multipliers in a Globalized World

This paper uses the central tool of an investment-savings and monetary-policy model with an augmented Philips curve and presents a few extensions of that model to analyze the multiplier effects of macroeconomic policies in the United States. In doing so, the authors incorporate realistic assumptions in the model related to the recent financial characteristics of the global economy. The monetary policy reaction function embeds a new augmented Taylor-rule incorporating housing and stock prices and the credit lending rate. And the household consumption and firm investment decisions incorporate housing and stock assets and the credit market frictions. The equilibrium income is derived and compared with the actual nominal gross domestic product of the United States for the period 1990 to 2009. More importantly, fiscal and trade multipliers are derived and discussed. The main finding is that government spending, tax cut, and trade multipliers are relatively smaller in size when more realistic features are incorporated in the model. The model simulation shows that the model can track actual gross domestic product reasonably well. The model should be further improved before it could be used for policy exercises.

Bibliographic Details

Main Authors:	Mba, Leopold Engozogo, Nallari, Raj
Language:	English
Published:	2010-04-01
Subjects:	ADVANCED COUNTRIES, ADVANCED ECONOMIES, AGGREGATE DEMAND, AGGREGATE SUPPLY, AGGREGATE SUPPLY CURVE, ASSET PRICES, ASSET VALUES, ASSETS, AVAILABILITY OF CREDIT, BALANCE SHEET, BALANCE SHEETS, BANK INTEREST RATE, BANKING SECTOR, BANKRUPTCY, BOND, BOOM-BUST CYCLES, BUDGET CONSTRAINT, BUSINESS CYCLES, CAPITAL ASSETS, CAPITAL GAINS, CAPITAL INFLOWS, CAPITAL INVESTMENT, CAPITAL MARKET, CAPITALIZATION, CENTRAL BANK, CENTRAL BANKS, CLOSED ECONOMIES, CLOSED ECONOMY, COLLATERAL, COMMODITY, COMMODITY PRICES, CONSUMER DURABLES, CONSUMER SPENDING, CONSUMERS, CONSUMPTION FUNCTION, CORPORATE TAXES, CREDIT CONSTRAINED FIRMS, CREDIT MARKET, CREDIT MARKETS, CREDIT SPREADS, CREDITOR, CREDITS, CURRENT ACCOUNT, DEBT, DEPOSITS, DERIVATIVE, DEVALUATION, DEVELOPING COUNTRIES, DEVELOPING ECONOMIES, DEVELOPMENT POLICY, DISCRETIONARY FISCAL POLICY, DISPOSABLE INCOME, DOMESTIC BONDS, DOMESTIC ECONOMY, DOMESTIC INFLATION, ECONOMIC ACTIVITY, ECONOMIC AGENTS, ECONOMIC CRISIS, ECONOMIC OUTLOOK, ECONOMIC POLICY, ECONOMIC RESEARCH, ELASTICITY, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET COUNTRIES, ENDOGENOUS VARIABLES, EQUILIBRIUM, EXCHANGE RATE, EXCHANGE RATE REGIMES, EXCHANGE RATES, EXPANSIONARY FISCAL POLICY, EXPANSIONARY POLICIES, EXPOSURE, FEDERAL RESERVE, FINANCES, FINANCIAL ASSETS, FINANCIAL CONTAGION, FINANCIAL CRISIS, FINANCIAL DISTRESS, FINANCIAL INNOVATION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIATION, FINANCIAL MARKET, FINANCIAL SYSTEM, FISCAL POLICY, FISCAL STIMULUS, FIXED EXCHANGE RATE, FLEXIBLE EXCHANGE RATE, FLEXIBLE EXCHANGE RATE REGIME, FOREIGN COMPETITION, FOREIGN INTEREST, FOREIGN INTEREST RATE, FOREIGN INTEREST RATES, FOREIGN TRADE, GDP, GLOBAL ECONOMY, GOVERNMENT BOND, GOVERNMENT BONDS, GOVERNMENT BUDGET, GOVERNMENT DEFICIT, GOVERNMENT EXPENDITURE, GOVERNMENT SPENDING, GROSS DOMESTIC PRODUCT, HEDGE FUNDS, HOLDING, HOLDINGS, HOUSEHOLD WEALTH, HOUSEHOLDS, INCOME, INCOME LEVEL, INCOME TAX, INFLATION, INFLATION EXPECTATIONS, INFLATION RATE, INSTRUMENT, INSURANCE POLICIES, INTEREST ON BONDS, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INTERNATIONAL FINANCIAL MARKETS, INTERNATIONAL MONETARY FUND, INTERNATIONAL TRADE, INVESTMENT DECISION, INVESTMENT DECISIONS, INVESTMENT FUNCTION, INVESTMENT VEHICLE, LIFE-INSURANCE, LIQUIDITY, LOAN, LOAN RATE, MACROECONOMIC POLICIES, MACROECONOMICS, MARGINAL PROPENSITY TO CONSUME, MARGINAL PROPENSITY TO IMPORT, MARKET CONTAGION, MARKET LENDING, MARKET PRICE, MARKET VALUE, MARKET VALUES, MONETARY ASSETS, MONETARY ECONOMICS, MONETARY FUND, MONETARY POLICIES, MONETARY POLICY, MONETARY POLICY REACTION FUNCTION, MONETARY POLICY RULE, MONETARY TRANSMISSION, MONETARY TRANSMISSION MECHANISM, MONEY CREATION, MONEY MARKET, MONEY SUPPLY, MORTGAGE, MORTGAGE-BACKED SECURITIES, MULTIPLIER EFFECTS, MULTIPLIERS, NATIONAL INCOME, NET EXPORTS, NET WORTH, NOMINAL EXCHANGE RATE, NOMINAL INTEREST RATE, OPEN ECONOMIES, OPEN ECONOMY, OUTPUT, OUTPUT GAP, PENSION, PENSION FUNDS, PERMANENT INCOME, PERPETUITY, PERSONAL INCOME, PHILLIPS CURVE, POLICY RESPONSE, PRICE ELASTICITY, PRIVATE INVESTMENT, PROBABILITY OF DEFAULT, PUBLIC FINANCES, PUBLIC INVESTMENT, PUBLIC SPENDING, REAL ESTATE, REAL INTEREST, REAL INTEREST RATE, RECEIPTS, RECESSION, RECESSIONS, REINVESTMENT, SAVINGS, SPECULATIVE BUBBLES, STOCK MARKET, STOCK MARKETS, STOCK PRICE, STOCK PRICES, STOCKS, TAX, TAX RATE, TERMS OF CAPITAL, TOTAL DEBT, TRADE BALANCE, TRADE BALANCES, UNEMPLOYMENT, WEALTH, WORLD MARKETS, WORLD TRADE,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100423133702 https://hdl.handle.net/10986/3764
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