We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.
Fiscal Stimulus and Distortionary Taxation
Thorsten Drautzburg, Harald Uhlig
NBER Working Paper No. 17111
Issued in June 2011
NBER Program(s): EFG
I'm confused about the concept of the fiscal multiplier.
I've read explanations characterizing the multiplier as a simple multiple: if the multiplier is 1.5 and the government spends $1 million, then the net spending beyond that $1 million is $500,000.
1.5 x 1,000,000 = 1,500,000
But that's not right, is it?
What does a multiplier of .52 actually mean in terms of what the public spends beyond the amount the government spent?