Wednesday, October 21, 2009


Here is one discussion of multipliers and what we know as the current experiment reveals itself.

There are two principles that are often skipped in these discussions. First, there are hypothetical multipliers that come out of macro-models and that require a ceteris paribus assumption. But the ex post evaluations of multiplier effects must relax the assumption and, therefore, require careful econometric work. The ex post findings can never match the theoretical multipliers. In fact, any expectation that they should suggests that someone ignored ceteris paribus.

Second, multiplier analyses ignore market adjustments and are only useful in the very short run. Suggesting that multiplier results hold over any longer period ignores markets. That would be a major omission.

These are two simple points and I wish they were made explicit in all of the current discussions (pre- and post-stimulus).