Turni ng t o the em pi ri cal evi dence, as em erges cl earl y from t he fi rs t and s econd m odel vari ant of our d yn am i c m odel and our est im at es, m ul ti pli ers var y great l y wi t h t he s t at e of t he busi ness c ycl e, and i n parti cul ar wit h res pect t o t he fi nanci al regi m e t he econom y i s i n. The regi m es of fi nanci al fragi l it y and fi nanci al st res s are si gni fi cant forces for t he effecti veness and m agnit ude of t he fi s cal m ul ti pli er. W e have expl ored downward pres s ur es in an econom y unde r fi nanci al st ress – pressures t hat can prevent recover y and debt s t abil iz ati on from t aking pl ace.
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At t he l evel of t heor y, t hi s is pl ausi bl e i n t erm s Ke ynes i an economi cs . Ke ynes des cri bes i n his bus ines s c ycl e t heor y t he fragi li t y of t he propensi t y t o cons um e, i nvest and hol d li qui d as s et s . The cons equence of this fragility is the downward movement “takes place suddenly and violently”. This brings about a sudden asset price fall, credit contractions, credit defaul ts and s udden fi nan ci al m arket cris es s uch as furt her il lus t rat ed i n t he st udi es b y Ki ndl eberger (1989) and Mi ns k y (1992). All this i s l i kel y t o res ult in consi derabl e downward m ult ipli er e ffect s i f fi s cal cont ract ion i s enact e d.
However, it i s wort h not i ng t hat t he re gi m e d ependence of t he fi s cal mult i pl i er i s al so affect ed b y t he ext ent t o whi ch fi s cal and m onet ar y pol i c y i nt eract . To s tud y t hi s cas e, fis cal poli c y needs t o be model ed m ore speci fi call y, but t hi s was be yond t he s cope of t he pres ent paper. For a det ai l ed st ud y of t he effect of fi scal cons ol idat ions when t here i s a monet ar y and fis cal poli c y i nt eracti on, see C anofori et al . (2016) and Haider and S emm l er (2018), where t hi s is s ue i s s t udi ed i n parti cul ar wi th res pect to the European M onet ar y Uni on.
One rem ai ning i s s ue is how m uch can be l earnt from t he em pi ri cal st udi es and the above m odel about t he m el t down res ult ing from t he P andemi c R eces s ion and the fis cal m ul ti pli er. At t he ons et of the P andemi c R ecession in t he fi rst hal f of t he 2020s, l arge -s cal e m onet ar y a nd fi s cal pol i ci es were enact ed – fi rst l i qui di t y provis i on, t hen res cue operat ions agai ns t ins ol venci es , and fi nall y recover y s upport for busi ness es and househol ds. Thi s occurred i n parti cul ar in t he US as well as Europe. And yet , gi ven t he uncert ai nt y of di s coveri ng an effect i ve vaccine, and t he res pons e of hous ehol ds , fi rm s and t o t he crit i cal si t uat i on wi t h l ower future spending, no l arge fis cal mul ti pl i er can be expect ed. Due to l ockdowns, and furt her s preadi ng of t he P andem i c when regul at i ons are rel a x ed, t here is nat ural l y res t rai ned spending behavi or on t he part of hous ehol ds and fi rm s for part i cul ar acti vit i es and s ectors. Li qui di t y has bee n buil t up but the ins ol venc y ri sk, and actual i nsol venc y, are al s o hi gh – becaus e of fall i ng revenues due t o d efi ci ent dem and. S o nat ural l y t he mult i pl i er wil l turn out t o be ver y modest ; see St i gl itz and R ashi d (2020).
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It has , however, been sugges t ed that there are s pendi ng ar eas where a hi gher m ult i pl i er coul d be ex pect ed; s ee Hepburn et al . (2020). As argued in s om e m acro res earch, fis cal spendi ng on cli m at e prot ect ion, renewabl e energ y and a low -ca rbon econom y, for e xam pl e for m ore sus t ai nabl e publi c t ransport , cli m at e rel at ed infrast ruct ure, energy effi ci e nc y, bui l di ng ret rofi ts , and enhancem ent of hum an ca pi t al s houl d all accel erat e sus t ai nabl e growt h. Prel im inar y work on the m ult ipli er effec ts of s pendi ng in t hes e t ypes of are as s eems t o i ndi cat e t hat t he mult i pl i er i s great er t han in t he cas e of gene ral fi s cal spending increas e, t ax reduct ion and cas h pa ym ent s t o hous ehol ds and fi rms. Yet furt her res earch on t hi s i ss ue i s needed.
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