Elucidating General Equilibrium Multiplier Effects: A Differential Perspective

Abstract

Expenditure multipliers are routinely used to evaluate the effectiveness of government spending. When interested in disaggregated effects, interindustry models provide the necessary tools to be able to look at very detailed sectorial results. These models are theoretically simple and empirically operational, which makes them easily implementable and therefore popular with policy makers. They miss, however, quite a bit of the interaction that takes place at the micro level. On the one hand, they ignore the role exerted by supply constraints in primary factors; on the other hand, they look at the world as though it is fully linear. We overcome these limitations by using an opposite Walrasian general equilibrium model to compute marginal multipliers. By using differential calculus, we also offer some insights regarding the “under-the-hood” circuits of influence.