An additional explanation for the variable Keynesian multiplier: The role of the propensity to import

ABSTRACT

This article analyzes the concept of the Keynesian multiplier from a new perspective. Several recent studies have shown that the fiscal multiplier is endogenous to the level of economic activity, increasing during recessions and decreasing during the boom. Here, we provide some evidence, explaining this variability over the business cycle, based on the overreaction of aggregate imports. Then, we apply the concept of endogenous propensity to import, varying with capacity utilization, to a neo-Kaleckian model of growth and distribution. We perform some simple simulations showing that the Keynesian multiplier increases during a recession, which logically does not advocate a reduction in public spending when the economy is in crisis.

KEYWORDS:

• Keynesian multiplier
• propensity to import
• recessions

JEL CLASSIFICATIONS:

• E12
• E20
• E62
• F41

Notes

¹Based on the initial contribution made by Kahn (1931).

²Obviously, we do not deny the importance of taxes and propensity to save but leave those elements and their interactions for future research.

³In what follows all data are in real terms.

⁴The case of Greece during the period 1992–93 represents an exception.

⁵Calculations (stability analysis, equilibrium, and multiplier value) are presented in the Appendix.

⁶Note that during a recession animal spirits, represented in the term g₀ and traditionally considered to be positive in normal times, may become negative.