Some Amendments to the Algebraic Representation and Empirical Estimation of the Fiscal Multipliers

Nizam, Ahmed Mehedi (2020): Some Amendments to the Algebraic Representation and Empirical Estimation of the Fiscal Multipliers. Published in: Heliyon , Vol. 6, No. 11 (November 2020)

Abstract

Conventional algebraic estimate of the fiscal multipliers ignores the concept of velocity of money and mistakenly assumes that money changes hands an infinite number of times during a given year while we know money only has a finite velocity. Apart from the velocity of money, fiscal multipliers tend to depend on average propensity to consume and average propensity to import of the economy as a whole and also on average tax rate among other things which are not reflected in the modern SVAR based estimation. Here, in the first place, we amend the algebraic definition of the fiscal multipliers considering the impact of velocity of money, provide a micro-foundation relating fiscal multipliers with money velocity and other macro variables and later propose a modification in the conventional SVAR set up by incorporating aforesaid macro variables arranged in a logical manner. Proposed amendments to the SVAR set up entail relatively stable estimates of the fiscal multipliers as can be seen from empirical estimation of the multiplier values for US and UK data during the period 1972-2018.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal multipliers; money velocity; government spending multipliers; average propensity to consume; average propensity to import; average tax rate
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General

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