Brown Bag Series
Understanding Government Spending Multiplier
In this paper we develop a closed economy macro model with rule-of-thumb and Ricardian consumers to study the size of government spending multiplier. We model both anticipated and unanticipated government spending shocks. Our model also accounts for cost channel of monetary policy and supply-side effects of government spending. We also analyzed the effectiveness of government spending when the zero lower bound on the interest rate (ZLB) binds, which was the case in 1930’s and during 2008 financial crises. Throughout our paper, we study the effects of government spending on private consumption, hours-worked, and inflation. In normal time i.e., when ZLB does not bind, we show that when utility driven from consumption is separable from disutility of hours-worked, the increase in government spending will lead to increase in consumption when the model contains either a certain mass of rule-of-thumb consumers or government spending contemporaneously effect the productivity of labor or both. We show that in the event of ZLB, the size of the government spending multiplier is relatively strong if government spending has no supply-side effects. We learn that the presence of cost channel reduces (increases) the size of the multiplier if government spending have no (have) supply-side effects. We also show that anticipated increase in government spending are recessionary in the impact period, but become expansionary at the time of execution of the policy.
About the Speaker:
Dr. Syed Zahid Ali is a Professor of economics at the Lahore University of Management Sciences. He did his M.A and PhD in economics from McMaster University Canada. He joined LUMS in 2002. His teaching interests cover areas like Macroeconomics, Microeconomics, Mathematical economics, Monetary Economics, Econometrics, and Finance etc. Dr. Ali also taught at various universities including: McMaster University, Hamilton, Ontario (Canada), International Islamic University (Islamabad), Quaid-I-Azam University (Islamabad), and Bond University (Australia). He wrote a number of research papers in the area of both macro and monetary economics which were published in journals of international repute such as Canadian Journal of Development Studies, Economic Modelling, Economics Letters, Applied Economics Letters, International Review of Economics and Finance, Quarterly Review of Economics and Finance, and Journal of International Money and Finance etc.
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