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American Economic Journal: Macroeconomics: Vol. 3 No. 1 (January 2011)

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Simple Analytics of the Government Expenditure Multiplier

Article Citation

Woodford, Michael. 2011. "Simple Analytics of the Government Expenditure Multiplier." American Economic Journal: Macroeconomics, 3(1): 1-35.

DOI: 10.1257/mac.3.1.1

Abstract

This paper explains the key factors that determine the output multiplier of government purchases in New Keynesian models, through a series of simple examples that can be solved analytically. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary policy response. A multiplier well in excess of one is possible when monetary policy is constrained by the zero lower bound, and in this case welfare increases if government purchases expand to partially fill the output gap that arises from the inability to lower interest rates. (JEL E12, E23, E32, E62, H20, H50)

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Authors

Woodford, Michael (Columbia U)

JEL Classifications

E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General
H50: National Government Expenditures and Related Policies: General

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