The goal of this note is to calculate the balanced budget multiplier for disposable income. This multiplier is shown to be equal to zero under reasonable conditions. This could explain why a balanced budget's empirical explanatory power on aggregate output is so low. Under Ricardian equivalence, debt-financed government spending can be regarded a balanced budget fiscal policy, according to the article. This also explains why, contrary to expectations, the government spending multiplier is empirically shown to be much less than one, and closer to zero than one. Furthermore, the paper claims that a balanced budget fiscal policy will have little effect on consumption, and that it may even fall. Given the pandemic's consequences, this should raise serious concerns about the present stimulus packages implemented by Western nation governments to boost aggregate demand. There's a good chance that the stimulus initiatives won't be as effective as policymakers had hoped.
Author (S) Details
Samih Antoine Azar
Faculty of Business Administration and Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon.
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