LECTURE 5: KEYNESIAN MULTIPLIERS AND THE TRANSFER PROBLEM.

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LECTURE 5: KEYNESIAN MULTIPLIERS AND THE TRANSFER PROBLEM

ITF-220- Prof.J.Frankel, Harvard Kennedy School 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 in 1990s). “Twin deficits”: Fiscal multiplier

Example: EU fiscal austerity has been contractionary. Source: P.Krugman, 10 May 2012, via R.Portes, May 2013.

ITF-220- Prof.J.Frankel, Harvard Kennedy School Export multiplier

SUMMARY OF MULTIPLIERS + Keynesian model of S + M => Fiscal Expansion open-ec. multiplier = 1/(s+m)<1/s Devaluation Note misprint in Equation (17.11), 10 th ed. of WTP.

ITF-220- Prof.J.Frankel, Harvard Kennedy School The Transfer Problem The 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.

Historical examples: Applications of the transfer problem

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 FIGURE 17.3

ITF-220- Prof.J.Frankel, Harvard Kennedy School End of Lecture 5: Keynesian Multipliers and the Transfer Problem in a Small Country

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