Why the Keynesian Multiplier Increases During Hard Times: A Theoretical Explanation Based on Rentiers' Saving Behaviour

Abstract

International audienceThis article analyses the Keynesian multiplier from a new perspective. Recent empirical studies emphasize that the multiplier is endogenous to the level of economic activity, increasing during recessions and declining in expansions. Here, we propose a plausible explanation for this established fact based on the procyclicality of capitalists' propensity to save. Then, using a standard Kaleckian model of growth and distribution, we perform some simple simulations showing that fiscal multipliers increase during turbulent times. Consequently, this argues against cutting public spending for economies in recession

Réflexions et suggestions autour du concept d’output gap

“…À la manière d'une règle de Taylor qui détermine la politique monétaire, il serait envisageable de suggérer une règle budgétaire basée sur nos deux outputs gaps : l'impulsion budgétaire à mettre en oeuvre chaque année pourrait être une moyenne pondérée des deux écarts constatés entre, d'une part, le taux d'utilisation normal et le taux d'utilisation effectif, et, d'autre part, le taux de chômage effectif et le taux de chômage de plein-emploi. Cette impulsion budgétaire nécessaire serait d'autant plus faible que le multiplicateur keynésien est élevé... ce qui est particulièrement le cas lors des épisodes de récession (Charles et al, 2015).…”

Time variation in the size of the multiplier: a Kalecki–Harrod approach

“…Private sector responses to different macroeconomic conditions may also influence the size of the multiplier. Charles et al (2015) develop a theory of time variation in the size of the multiplier that hinges on changes in the saving rate and its impact on the process of demand formation. The key insight in this paper derives from application of the relative income hypothesis associated with Duesenberry (1949).…”

“…The key insight in this paper derives from application of the relative income hypothesis associated with Duesenberry (1949). Hence according to Charles et al (2015), whereas propensities to save are typically held constant in structuralist-Keynesian macro models, low growth or falling incomes may, in fact, induce rentiers -who demonstrably out-save other members of society (Taylor et al, 2014;Saez and Zucman, 2014) 2 -to reduce their propensity to save in order to maintain consumption at levels commensurate with those achieved in the past. This will enhance the total expansion of expenditure and output associated with any given initial increase in spending -i.e., increase the size of the multiplierrelative to what would be observed in a high growth, expansionary environment.…”

How low can we go? The limits of monetary policy

“…identify some simple math errors in this paper that, when corrected, yield opposite results. 4 Charles et al (2015). andSetterfield (2015) provide some explanations for why this might be so.146 Review of Keynesian Economics, Vol.…”