Abstract

We will shed some light on meaning of empirical estimates of the multiplier an their proper use. On the general level, we will undertake a critique of the multiplier, explaining the role that various assumptions play in the three leading methodologies for calculating multiplier values. We find that two types of assumptions are crucial: “counterfactual assumptions” that specify the baseline against which the impact of the stimulus is judged and “behavioral assumptions” about the decision-making processes of economic agents. On the specific level, we apply what we learn from the critique to a sample of recent work claiming that certain aspects of the 2009 American Recovery and Reinvestment Act’s (ARRA) stimulus were ineffective—in particular, work by Stanford’s John Cogan and John Taylor claiming that ARRA funds funneled through state governments had no effect because states saved rather than spent the funds. We argue that the conclusions of these studies are highly sensitive to counterfactual and behavioral assumptions that are in some cases questionable and in others clearly implausible. We conclude with some general thoughts on the proper use and interpretation of the multiplier in assessing fiscal stimulus programs.

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Additional Information

ISSN
1944-768X
Print ISSN
0037-783X
Pages
pp. 819-854
Launched on MUSE
2014-04-30
Open Access
No
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