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LECTURE 5: KEYNESIAN MULTIPLIERS
AND THE TRANSFER PROBLEM
• The multiplier for an increase in 𝐴 , e.g., due to a fiscal expansion.
• The multiplier for an increase in 𝑋 , e.g., due to a devaluation.
• The Transfer Problem, e.g., due to a unilateral transfer 𝑇 .
ITF-220- Prof.J.Frankel, Harvard Kennedy School
ΔG leads to both a fiscal deficit & trade deficit (US in 1980s & 2001-07).
But if the exogenous rise is ΔI, BD & TD move opposite directions (US in 1990s).
“Twin deficits”:
𝑨 ↑, e.g., due to fiscal stimulus: 𝑮 ↑. Fiscal multiplier
Example: EU fiscal austerity has been contractionary.
Source: P.Krugman, 10 May 2012, via R.Portes, May 2013.
ITF-220- Prof.J.Frankel, Harvard Kennedy School
ΔE shifts the X-M line up by Δ𝑿 , the elasticities answer. But the rise in TB is partially offset by higher imports.
𝑿 ↑, e.g., due to a devaluation: 𝑬 ↑. Export multiplier
SUMMARY OF MULTIPLIERS
MX I NS
ms
MXA Y
G I CA where
Ams
1 Y
Ym- ΔM ΔTB
+ Keynesian model of S + M =>
Fiscal Expansion
open-ec. multiplier = 1/(s+m)<1/s
YmXΔ ΔTB
Xms
1 Y
Devaluation
Note misprint in Equation (17.11), 10th ed. of WTP.
. AΔms
m
XΔ
ms
s
. XΔ
ITF-220- Prof.J.Frankel, Harvard Kennedy School
The Transfer Problem
The Question: If one country makes a unilateral transfer ΔT to the other, does the recipient buy enough goods from the transferor so that the latter’s ΔTB
• falls short of the transfer ? => ΔTB - ΔT < 0
=> “transfer is under-effected” => CA ↓ .
• exceeds the transfer ? => ΔTB - ΔT > 0
=> “transfer is over-effected” => CA ↑ .
• equals the transfer ? => ΔTB - ΔT = 0
=> “transfer is fully effected” => ΔCA = 0 .
Historical examples: Applications of the transfer problem
The US TB improved in the late 1980s, due to $ depreciation and especially, in 1990-91, US recession.
The current account even went into surplus briefly in early 1991.
Why? Transfers received from Kuwait, Saudi Arabia, et al.
ITF-220- Prof.J.Frankel, Harvard Kennedy School
FIGURE 17.3
ITF-220- Prof.J.Frankel, Harvard Kennedy School
End of Lecture 5: Keynesian Multipliers
and the Transfer Problem
in a Small Country