At the heart of these arguments is the question of whether government spending has a positive or negative multiplier, ie create more or less bang for each buck. Keynesians think the former; neoclassicists think the latter. It seems (to this blogger, at least) intuitive that the impact of a stimulus will be dependent on the initial conditions of the economy; factors such as the size of the output gap and the overall level of government debt will play a role. For example, a government will find it easier to finance a deficit if it starts from a low debt-to-GDP ratio; if it starts from 100%, its borrowing costs will rise, offsetting any fiscal stimulus. This study from the National Bureau for Economic Research illustrates the point; it says that factors like exchange rate flexibility and openness to trade play a role. It also finds that
Wednesday, August 3, 2011
Is the budget deal good for the US?
The answer depends on whether you believe in Keynesian economics or not: