balanced budget

It is concluded that the type of public spending and its relations to the labor-leisure choice are an important determinant of the simple balanced budget multiplier. The implicit assumption of government spending having no effect on the work-leisure choice is only partially valid and thus leads to analytic distortion in the determination of the simple balanced budget multiplier.

The "balanced budget multiplier" is based on the notion that government spends a greater proportion of what it takes in than private individuals, for private individuals may save some of what they earn.

In line with these studies, this paper turns its attention to explore the implication of working-capital cost on the balanced budget multiplier. It can be found that the balanced budget multiplier may be negative depending on the extent of working-capital cost.

In economists' jargon, this argument suggests that the balanced budget multiplier for interest payments is negative.

To solve for the balanced budget multiplier, it is necessary to first differentiate the government's budget constraint: dG = tdY + dtY.

It is well understood in the macroeconomics literature [Dornbusch and Fischer, Macroeconomics, 1990] that the balanced budget multiplier is unity in a simple Keynesian model but it will be less than unity in an IS-LM model.