Implied Output Response To Demand Side Shifts In The Friedman Scenario Under Local To Potential Assumptions

I was wondering what a conventional (estimated) macroeconometric model implied for a sustained 7.7% increase in government consumption and investment as a share of GDP implies for output.

Table 19 in Friedman (2016) provides a tabulation of annual expenditures implied by his understanding of the Sanders economic plan. Not all of the spending is government consumption and investment — some is government transfers. However, if I assume that the marginal propensity to consume out of these transfers is unit, then the calculation is simplified (in any case, the big expenditures are health care).

Figure 1 depicts the deviation from CBO (January 2016) baseline, as a share of baseline GDP.

Figure 1: Deviation from CBO baseline in government consumption and investment, as a share of CBO baseline GDP, in Ch.09$, by fiscal year.

Source: CBO, Budget and Economic Outlook, 2016-2022 (January 2016); Friedman (2016), Table 19, and author’s calculations.

On average, government spending (will be higher by 7.7 percentage points of baseline GDP). I can just assume constant spending over the sample period, and use the multipliers from a given study to determine the resulting output. In this case, I use the OECD’s New Global Model, described inthis 2010 working paper. Here’s a short description of the macroeconometric model:

…Compared with its predecessors, the new model is more compact and regionally aggregated, but gives more weight to the focus of policy interests in global trade and financial linkages. The country model structures typically combine short-term Keynesian-type dynamics with a consistent long-run neo-classical supply-side. While retaining a conventional treatment of international trade and payments linkages, the model has a greater degree of stock-flow consistency, with explicit modelling of domestic and international assets, liabilities and associated income streams. Account is also taken of the influence of financial and housing market developments on asset valuation and domestic expenditures via house and equity prices, interest rates and exchange rates. As a result, the model gives more prominence to wealth and wealth effects in determining longer-term outcomes and the role of asset prices in the transmission of international shocks both to goods and financial markets.