LECTURE 5: KEYNESIAN MULTIPLIERS AND THE TRANSFER PROBLEM.

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Transcript of LECTURE 5: KEYNESIAN MULTIPLIERS AND THE TRANSFER PROBLEM.

  • Slide 1
  • LECTURE 5: KEYNESIAN MULTIPLIERS AND THE TRANSFER PROBLEM
  • Slide 2
  • ITF-220- Prof.J.Frankel, Harvard Kennedy School G leads to both a fiscal deficit & trade deficit (US in 1980s & 2001-07). But if the exogenous rise is I, BD & TD move opposite directions (US in 1990s). Twin deficits: Fiscal multiplier
  • Slide 3
  • Example: EU fiscal austerity has been contractionary. Source: P.Krugman, 10 May 2012, via R.Portes, May 2013.
  • Slide 4
  • ITF-220- Prof.J.Frankel, Harvard Kennedy School Export multiplier
  • Slide 5
  • SUMMARY OF MULTIPLIERS + Keynesian model of S + M => Fiscal Expansion open-ec. multiplier = 1/(s+m)
  • Slide 6
  • ITF-220- Prof.J.Frankel, Harvard Kennedy School The Transfer Problem The Question: If one country makes a unilateral transfer T to the other, does the recipient buy enough goods from the transferor so that the latters TB falls short of the transfer ? => TB - T < 0 => transfer is under-effected => CA . exceeds the transfer ? => TB - T > 0 => transfer is over-effected => CA . equals the transfer ? => TB - T = 0 => transfer is fully effected => CA = 0.
  • Slide 7
  • Historical examples: Applications of the transfer problem
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  • 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.
  • Slide 9
  • ITF-220- Prof.J.Frankel, Harvard Kennedy School FIGURE 17.3
  • Slide 10
  • ITF-220- Prof.J.Frankel, Harvard Kennedy School End of Lecture 5: Keynesian Multipliers and the Transfer Problem in a Small Country