Newer studies have incorporated exogenous variation in policies to determine how the output effects of government spending depend on particular economic, social, and political circumstances. In recent decades, economists have been adopting theoretical innovations including the effects of labor market slack, consumer behavior, sticky prices, and interest rates at the zero lower bound (ZLB). In the 1980s, neoclassical economists began to observe the empirical relationship between defense spending and economic output and found the effects to be positive, but typically below 1.0. Early theoretical Keynesian investigations placed great faith in the importance of marginal propensity to consume and tended to find multipliers as high as 3.0 or more. Such results were often perceived as a full-throated endorsement of government stimulus spending. Over the past two decades, economists have been debating the size of fiscal spending multipliers to determine whether large government investments or economic stimulus packages are effective at raising economic output. A multiplier smaller than 1.0 means that for every additional $1.00 the government spends, GDP is boosted by an amount smaller than $1.00, which often occurs when an increase in government expenditure creates a negative wealth effect, crowding out private investment and consumption. A multiplier greater than 1.0 means that for every additional $1.00 the government spends, GDP is boosted by an amount larger than $1.00. ![]() Economists typically define the fiscal multiplier as the ratio of a change in the dollar value of output to a change in government spending. A multiplier of 1.0 means that for every additional $1.00 the government spends, GDP is boosted by an equal amount ($1.00). In simple terms, the fiscal multiplier, an idea popularized by the economist John Maynard Keynes, is a measure of the effect that increases in government spending have on economic output, or GDP. Fiscal Multipliers: What Economists Know (and Don’t Know) As debt levels continue to rise (and multipliers subsequently fall), policymakers will feel compelled to commit larger packages of stimulus spending during economic downturns, which poses a significant inflationary risk for future economic crises. The bulk of empirical literature reveals a significant negative relationship between public debt levels and the size of fiscal multipliers. ![]() In addition, we explore the inflationary risks that arise with future economic downturns if public debt levels continue to rise at projected rates. ![]() We then review the growing economic literature on the relationship between the fiscal position and the size of the fiscal multiplier. In this policy brief we discuss what economists know (and don’t know) about fiscal spending multipliers. Policymakers and economists’ renewed faith in large fiscal multipliers led many to contend that government stimulus spending can stabilize a country’s ailing economy by stimulating aggregate demand and closing the output gap. Despite over a decade of theoretical innovations and empirical discovery, many economists continued to make bold claims about large fiscal multipliers in the range of 1.5 to 2.0. One economic variable that has been increasingly drawing the attention of economists is the level of public debt, or the fiscal position of an economy, in relation to the size of the fiscal multiplier. As in every economic crisis, fiscal stimulus discussions became more prominent during the pandemic-induced downturn of 2020.
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