The Keynesian Multiplier Effect Reconsidered

Authors


  • I am indebted to Masao Ogaki (the editor) for his very stimulative suggestion and to the anonymous referees for their helpful comments. Comments and suggestions by Hiroyuki Kojima, Noriaki Matsushima, Katsuya Takii, and Akihisa Shibata were particularly valuable. I also thank Craig Freedman, Shinsuke Ikeda, Junichi Itaya, Ryuichiro Murota, Kazuo Ogawa, and Yoshiaki Sugimoto for discussions, and David Flath and Noel Gaston for assistance with the editing and the exposition of the paper. This research is financially supported by the Grants-in-Aid for Scientific Research, the Japan Society for the Promotion of Science (JSPS), and the Global Center of Excellence (GCOE) Program, and the Ministry of Education, Culture, Sports, Science, and Technology. The opinion expressed is my own and does not necessarily reflect that of the government of Japan.

Abstract

In the standard Keynesian framework, government spending on useless public works has a larger multiplier effect than spending on government transfer payments does. In other words, spending on useless public works increases national income by more than an equivalent increase in government transfer payments would. Nevertheless, their effects on national benefit are identical. For both, the national benefit equals the direct benefit created by the spending. If there are two income classes, some transfers reduce both the national income and the national benefit. Some government purchases completely crowd out private consumption and reduce the national benefit.

Ancillary