LECTURE 5:KEYNESIAN MULTIPLIERS
AND THE TRANSFER PROBLEM
• The multiplier for an increase in , e.g., due to a fiscal expansion .
X
A
• The multiplier for an increase in , e.g., due to a devaluation.• The Transfer Problem .
T
EU fiscal contraction has evidently been contractionary
Source: P.Krugman, 10 May 2012, via R.Portes, May 2013.
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 1990s).
“Twin deficits”:
ITF-220- Prof.J.Frankel, Harvard Kennedy School
ΔE shifts the X-M line up byΔX, the elasticities answer.But the rise in TB is partially offset by higher imports.
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 ProblemThe 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 .
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
ITF-220- Prof.J.Frankel, Harvard Kennedy School
End of Lecture 5: Keynesian Multipliers
andthe Transfer Problem
in a Small Country