Monday, March 9, 2009

New Keynesian Multipliers Much Smaller

Greg Mankiw's recent post on New Keynesian multiplier research.

The gist of the research is that Government spending multipliers in an widely-cited new Keynesian model are much smaller than in the old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large and with private sector employment impacts likely to be even smaller.

New Keynesian economics takes into account Rational Expectations, i.e., people adjust their behavior based on what they expect to happen in the future. Very similar to Efficient Markets.

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