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Rethinking multipliers in a globalized world (English)

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.

Details

  • Author

    Engozogo Mba,Leopold, Nallari,Yugandhar Raj

  • Document Date

    2010/04/01

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS5277

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2010/07/01

  • Disclosure Status

    Disclosed

  • Doc Name

    Rethinking multipliers in a globalized world

  • Keywords

    marginal propensity to consume;marginal propensity to import;lending rate;fixed exchange rate regime;fiscal multiplier;flexible exchange rate regime;devaluation of exchange rate;monetary policy reaction function;nominal gross domestic product;personal income tax rate;asset investment;government spending;monetary policy rule;Exchange Rates;net export;aggregate demand;foreign interest rate;aggregate supply curve;tax cut;global economic crisis;government budget constraint;fiscal stimulus package;housing price;global economic recovery;expansionary fiscal policy;exchange rate pass;emerging market country;european central bank;reduction in tax;interest on bond;nominal exchange rate;international financial market;negative demand shock;government spending multiplier;cambridge university press;mortgage backed securities;increase in income;balance sheet effect;increase in consumption;monetary transmission mechanism;discretionary fiscal policy;import of goods;traditional keynesian;money demand increase;finance and economic;real interest rate;nominal interest rate;term capital;availability of credit;output gap;stock price;probability of bankruptcy;availability of fund;probability of default;undervalued exchange rate;foreign income;government outlay;credit market;global economy;Position Note;inflation rate;Fiscal policies;loan rate;private investment;open economy;stock market;financial crisis;domestic good;government bond;national income;monetary asset;government deficit;Emerging economies;keynesian multiplier;simulation result;household wealth;multiplier effect;equilibrium output;private consumption;asset price;general equilibrium;trade balance;capital asset;housing assets;net worth;aggregate income;domestic inflation;initial capital;credit spread;Public Spending;domestic income;steady state;rational expectation;asset value;tax payment;consumption function;financial asset;disposable income;emerging economy;emerging country;world income;tax receipt;Capital Inflows;permanent income;goods market;investment demand;domestic bond;expansionary policy;consumer durable;trade account;government pay;International Trade;external stability;boom-bust cycle;financial distress;fiscal response;fiscal space;global financial;financial intermediaries;financial innovation;hedge fund;financial problem;financial contagion;oecd countries;output deviation;job impact;keynesian macroeconomics;business cycle;bank holding;government expenditure;negative relationship;money market;fiscal finance;cumulative effect;simulation exercise;quantity demand;speculative bubble;food grain;world market;foreign competition;increase tariff;foreign good;tax rebate;domestic household;market lending;endogenous variable;actual inflation;monetary condition;inflation expectation;investment vehicle;financial turmoil;Capital Investments;economic recession;advanced economy;tax multiplier;foreign country;empirical study;foreign trade;foreign demand;positive impact;equilibrium level;modern economy;policy variable;initial value;asymmetrical information;Macroeconomic Policy;capital gain;macroeconomic model;market price;price level;price elasticity;fixed regime;supply elasticity;money supply;international finance;development policy;government constraint;investment function;banking sector;financial characteristic;advanced country;corporate tax;automatic stabilizer;household spending;risk taker;Real estate;global phenomenon;total debt;dynamic effect;empirical macroeconomics;domestic economy;policy option;monetary economics;flexible regime;consumer spend;Fiscal Expansion;food stamp;fiscal position;unemployment benefit;money creation;text book;domestic policies;bond purchase;understanding credit;comparative static;balanced budget;public bond;macroeconomic effect;global demand;commodity price;financial intermediation;animal spirits;financial decision;world trade;cross border;inflation deviation;financial system;labor flow;international contagion;

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Citation

Engozogo Mba,Leopold Nallari,Yugandhar Raj

Rethinking multipliers in a globalized world (English). Policy Research working paper ; no. WPS 5277 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/578941468333304864/Rethinking-multipliers-in-a-globalized-world