BASE MULTIPLIER APPROACH

Base Multiplier Approach

Base Multiplier Approach

Introduction

During the depths of the Great Depression, with unemployment running above 25 percent, nearly any government spending that increased aggregate demand would have helped, leading to Keynes's famous comments about burying money, which led generations to believe Keynesian policy focuses on aggregate demand. The actual policy adopted during the New Deal, however, consisted primarily of micro-level economic intervention; total federal government expenditures were nearly insignificant and surely insufficient to end the depression through scale adjustments.

Base Multiplier

Base Multiplier economics are best understood if one views the General Theory as essentially a gold standard model. A close examination of Keynes''s statements on contemporaneous policy issues suggests that the gold standard had a profound impact on his views on monetary policy effectiveness.

In 1977 James Tobin, the United States'' most distinguished ''old'' Base Multiplier economist asked the question ''How dead is Keynes?'' (See Tobin, 1977). That Tobin was even asking this question highlights the turmoil which had begun to plague macroeconomics in the early 1970s and has continued ever since. Following the publication of Keynes''s General Theory macroeconomists have been broadly split between those who believe that the price mechanism, unaided by the visible hand of government, is capable of stabilizing a capitalist market economy which is subject to periodic shocks and those, like Tobin, who doubt the capacity of the system to self-equilibrate at a satisfactory level of employment. The synthesis of Base Multiplier and neoclassical analysis which formed the basis of a consensus in the 1950s and 60s appeared to have achieved an uneasy reconciliation between these two competing views.

New Base Multiplier economics, conceived in the late 1970s, sprang to life in the 1980s. Since the essential feature of Base Multiplier macroeconomics is the absence of continuous market clearing, the new Base Multiplier developments during the past decade have been primarily concerned with the ''. . . search for rigorous and convincing models of wage and/or price stickiness based on maximizing behavior and rational expectations'' (see Gordon, 1990). In contrast to the new classical monetary surprise and real business cycle models where price taking rational individuals make voluntary choices with respect to quantities, new Base Multiplier models contain price making, demand taking, risk-averse firms who operate in an imperfectly competitive, uncertain world riddled with imperfect information, transaction costs and asymmetric information (see Mankiw and Romer, 1991). New Base Multiplier economics seeks to understand and explain the causes of the imperfections in product, labor and capital markets and to show how these imperfections have macroeconomic consequences. In short ''New Base Multiplierism throws bucket fulls of grit into the smooth-running neoclassical paradigms'' (Leslie, 1993).

An economy that relies on money (rather than barter) to carry out transactions, (as most economies do today) one of the relevant markets--and an exceedingly important one at that--is the so-called "Money Market." Money is defined as the collection of instruments (one or more) that in a monetary economy are used as "means of payments" for the purchase or sale of goods and services, that is, ...