Thursday, February 05, 2009

The Great Multiplier Debate

Mark Thoma comments on Menzie Chin's post "Why Can't We All Just Get Along? The Great Multiplier Debate", which reviews the various estimates and methodologies used to produce the estimates of the impact of fiscal policy. One of the key insights Thoma develops as a result of reading the article is that the models are optimized to deal with the policy questions (and economic biases) of the time when they were created: shouldn't surprise us that most of the estimates on multipliers come from the old style, many equation, structural macroeconometric models, the traditional approach described above. These models were built at a time when questions about fiscal policy were in the forefront, so answers to fiscal policy questions come out of this framework easily. For this reason, because the models were built with this question in mind, there is an abundance of evidence about fiscal policy multipliers, particularly government spending multipliers, from research conducted during this time period. The next approaches to macro modeling and estimation, the micro-founded models and the VAR models, came into being as the fiscal policy question was falling by the wayside (most VAR models do not even include government spending and taxes). Thus, as you may have noticed, there isn't much in the way of evidence from these models that we can reply upon (and that's not even considering the fact that we have very little data from recessionary episodes to inform us on these issues). The models will be built - I guarantee you they are being built presently - but for now we have what we have.

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