Unpacking the Multiplier: Making Sense of Recent Assessments of Fiscal Stimulus Policy

Policymakers across the globe responded differently to the Great Recession, some with harsh austerity, others with activist income support and job growth strategies. This diversity offers a good laboratory to assess the relative merits of stimulus and austerity responses. Much of the answer depends on the values of 'the multiplier' -- the ratio of change in GDP to the resources expended due to the policy. Ever since Keynes made the multiplier a cornerstone of the analysis laid out in The General Theory of Employment, Interest, and Money, it has been standard shorthand for discussing the impact of exogenous 'shocks' of various kinds to the macroeconomy. In light of this, it is little wonder that recent multiplier-based assessments of the wisdom of fiscal stimulus have been all over the map-ranging from the highly pessimistic to the highly optimistic. Each of these individual assessments was calculated on a particular set of assumptions, using a particular methodology, at various levels of aggregation, examining a particular time frame. Adapted from the source document.