New Keynesian versus Old Keynesian Government spending multipliers



New Keynesian versus Old Keynesian Government spending multipliers

To analyze how government spending takes place in countries across the globe, we have taken up an article written by John F. Cogan, Tobias Cwik, John B. Taylor and Volker Wieland, four important authors and professors who have taught in prestigious universities and aim to analyze and understand the problems and situations that individuals must have in the area of creating the best and most effective findings regarding the application and implementation of the Keynesian theory in the area of the government expenditure.

As you begin to analyze the kind of information has been intended in the article, it becomes clear and reflective at the same time that individuals tend to adopt the Keynesian theory, as part of their applicative theories with reference to expenditures leaking out of a country. To begin with a brief description, new Keynesian theories suggests that further complex, yet improved models should be undertaken for cost-effectively and legible dissemination money circulation, inflow and outflow of funds.

The second effect is called crowding out. The increases in income set in motion by the multiplier effect will raise the demand for money. That will cause the interest rate to rise, which will reduce investment, consumption, and net exports. In this fashion, the initial fiscal policy action can “crowd out” other forms of spending. The crowding out will reduce the amount by which aggregate demand rises. The net effect on aggregate demand depends on the relative strength of the multiplier and crowding out effects.

Monetary policy can also be used to raise aggregate demand. If the central bank increases the money supply, the rate of interest will fall. That, in turn, will tend to raise investment, consumption, and net exports. Keynes argued in his General Theory (1936/1964) that monetary policy may be ineffective in a severe recession or depression because even very low interest rates may not rise spending sufficiently if investors and consumers have pessimistic expectations about the future.

Using the Keynesian spending (C + I + G) and the IS-LM models, Keynesians showed how monetary and fiscal policy could keep the economy on course. The 1960s was the longest economic expansion in U.S. history up to that time. However, as unemployment fell during the decade, inflation began rising and became a major domestic macroeconomic issue in the early 1970s.

From inflation rates of 1% to 2% in the early 1960s, an overheated U.S. economy was experiencing over 5% inflation by the end of the 1960s and into 1970. The U.S. economy had a relatively mild recession in 1970 with unemployment rising from a 1969 low of 3.4% to 6.1% by the end of 1970. As the economy slowed, it seemed reasonable to expect inflation to fall as excess demand was reduced. Somewhat surprisingly, inflation held steady. CPI inflation rose 5.5% in 1969 and was 5.7% in 1970 despite the weakening economy. Facing re-election in 1972, President Richard Nixon decided to impose a temporary 60-day wage ...