This thesis aims at giving a broad outlook on fiscal discussions and standpoints concerning crises which might occur and ultimately aims at answering the following question: How can financial authorities shape public spending and what are the steps necessary? – Lessons learned from the global financial crisis of 2008.
The Keynesian multiplier process is a concept which was first introduced by Richard Kahn and later on carried further by John Maynard Keynes. This concept was rather simple and very intuitive; if a government increases its spending, the resulting output will increase as well. This became especially relevant in times of crises, when governments were aiming at raising their output. The analysis of how government spending would affect output became omnipresent and there are different standpoints in the literature concerning this, most of them focusing on different aspects, such as the timing of news, spillover effects to other countries, the general environment of the economies and also different model approaches to estimate said multiplier as good as possible and to include as many different determinants as possible.
Table of Contents
1 Introduction
2 Literature Review
2.1 The Keynesian Multiplier Effect
2.1.1 General Explanation
2.1.2 Foundations and Macroeconomic Groundwork
2.2 State of the Literature
2.3 Concluding Literature Review and Answering Questions
3 Comparison of Countries and Model-Analysis
3.1 Government Spending and Output
3.2 Model Analysis on Different Parameters
3.2.1 Smets-Wouters Model (2003)
3.2.1.1 Benchmark
3.2.1.2 Monetary Policy Reaction Function to Inflation
3.2.1.3 Monetary Policy Reaction Function to the Output Gap
3.2.1.4 Interest Rate Smoothing
3.2.1.5 Beta and the Real Interest Rate
3.2.1.6 Share of Consumption
3.2.1.7 Concluding the Smets-Wouters Model
3.2.2 Del Negro et al. Model (2014)
3.2.2.1 Benchmark
3.2.2.2 Monetary Policy Reaction to Inflation
3.2.2.3 Monetary Policy Reaction to the Output Gap
3.2.2.4 Interest Rate Smoothing
3.2.2.5 Real Interest Rate
3.2.2.6 Share of Government Spending
3.2.2.7 Concluding the Del Negro et al. Model
4 Outlook and Conclusion
5 Appendix
5.1 Country Analysis
5.2 Smets-Wouters Model (2003)
5.3 Del Negro et al. Model (2014)
Research Objectives and Themes
This thesis examines the Keynesian multiplier effect within a monetary union, focusing on how fiscal authorities can effectively manage government spending during times of economic crisis. By synthesizing existing literature and conducting a model-based parameter analysis, the work seeks to answer how policy frameworks can be optimized to stabilize economies while addressing the lessons learned from the 2008 global financial crisis.
- The evolution and current state of the fiscal multiplier debate.
- Distinctions between new and old Keynesian modeling assumptions.
- Comparative analysis of government spending and output in G7 and euro area economies.
- Impact of financial frictions and policy parameters on economic stability.
Excerpt from the Book
2.1.1 General Explanation
The Keynesian Multiplier effect, or rather the multiplier analysis, is a central focus in macroeconomic theory and in the field of market intervention from financial institutions. John Maynard Keynes first introduced the concept of a multiplier in his work „The General Theory of Employment, Interest & Money” (Keynes, 1936/2007) where he further carried Richard Kahn’s line of thought, who introduced the first idea of a multiplier process in his article “The Relation of Home Investment to Unemployment” (Kahn, 1931). Kahn’s (1931) idea was that an increase of investment leads to increased employment and to meet those resulting increased expenditures of wages, the production of consumption goods is increased as well. There again, wages rise, and this effect will then be transmitted through the economy but with a diminished intensity (Kahn, 1931), meaning that the effect becomes less in magnitude over different steps along the production and consumption chain.
Keynes continued to work on this argument and stated that employment could only increase with investment unless there is a change in the marginal propensity to consume (a metric that quantifies induced consumption) (Keynes, 1936/2007). That means, according to Keynes (1936/2007), that in given circumstances, a certain ratio can be established between income and investment and between total employment and the employment, which is directly employed on investment, which Kahn (1931) called “primary employment”. This will be explained in the next section.
Summary of Chapters
1 Introduction: Provides an overview of the Keynesian multiplier process, discusses the context of the 2008 financial crisis, and outlines the research objective regarding how financial authorities should shape public spending.
2 Literature Review: Synthesizes various academic perspectives on fiscal multipliers, comparing old and new Keynesian models and discussing the impact of different economic environments on fiscal policy effectiveness.
3 Comparison of Countries and Model-Analysis: Compares fiscal data of G7 and euro area countries and uses the Smets-Wouters (2003) and Del Negro et al. (2014) models to simulate output responses to policy shocks under varying parameters.
4 Outlook and Conclusion: Summarizes the findings on fiscal commitments and hybrid modeling approaches, reflecting on how governments can better navigate future crises like the Covid-19 pandemic.
Keywords
Keynesian Multiplier, Fiscal Policy, Monetary Union, Financial Crisis, Government Spending, Crowding-out Effect, DSGE Model, Output Gap, Interest Rate Smoothing, Economic Stability, Macroeconomic Theory, Business Cycle, Fiscal Stimulus, Taylor Rule, Financial Frictions.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the effectiveness of the Keynesian multiplier effect within a monetary union, exploring how fiscal and monetary authorities can influence output through government spending, particularly drawing lessons from the 2008 financial crisis.
What are the central thematic areas?
Key themes include the distinction between new and old Keynesian economic models, the significance of crowding-in versus crowding-out effects, and the impact of national and international environments on fiscal multiplier size.
What is the primary research question?
The central question is: How can financial authorities shape public spending and what are the steps necessary, based on the lessons learned from the global financial crisis of 2008?
Which scientific methods are employed?
The work combines a literature review with a simulation-based model analysis. It utilizes the Smets-Wouters (2003) and Del Negro et al. (2014) DSGE models, processed via Dynare in MATLAB, to test how various parameters affect output after fiscal and monetary shocks.
What is covered in the main part of the work?
The main part covers a comprehensive literature review, a descriptive retrospective analysis of G7 and euro area country data, and an in-depth parameter analysis of macroeconomic models regarding their sensitivity to shocks.
Which keywords best characterize this work?
Essential keywords include Keynesian Multiplier, Fiscal Policy, DSGE Modeling, Financial Crisis, Government Spending, and Crowding-out Effect.
How do "financial frictions" affect the results in the Del Negro et al. model?
Financial frictions generally result in lower output responses compared to the Smets-Wouters model, as they introduce volatility in money supply and demand, making the economy less responsive to simple policy interventions.
Why is the "timing of news" regarding government spending important?
The timing of information is crucial because it influences how households and firms adjust their expectations and consumption behavior, which directly impacts the size and effectiveness of the fiscal multiplier.
- Arbeit zitieren
- Ole Ohlson (Autor:in), 2021, The Keynesian multiplier effect in a monetary union. Standpoints and outlooks, München, GRIN Verlag, https://www.grin.com/document/1223960
