Fiscal Policy under Long-Run Stagnation: A New Interpretation of the Multiplier Effect

31 Pages Posted: 25 May 2015

See all articles by Ryu-ichiro Murota

Ryu-ichiro Murota

Kindai University

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: May 20, 2015

Abstract

We develop a Keynesian cross analysis with a dynamic optimization setting that explains long-run stagnation caused by aggregate demand deficiency. We show that an increase in government purchases boosts GDP through a multiplier process, but the implication is quite different from the conventional Keynesian one. It works not through an increase in disposable income but through moderation of deflation. Thus, countries that have lapsed into long-run stagnation should expand government spending that directly creates employment in order to reduce the deflationary gap.

Keywords: Aggregate Demand, Consumption Function, Keynesian Cross, Multiplier Effect, Persistent Unemployment, Long-run Stagnation, Deflation

JEL Classification: E12, E24, E62

Suggested Citation

Murota, Ryu-ichiro and Ono, Yoshiyasu, Fiscal Policy under Long-Run Stagnation: A New Interpretation of the Multiplier Effect (May 20, 2015). ISER Discussion Paper No. 937. Available at SSRN: https://ssrn.com/abstract=2609963

Ryu-ichiro Murota (Contact Author)

Kindai University ( email )

3-4-1 Kowakae
Higashi-Osaka City, Osaka 577-8502
Japan

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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