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Irrepressible monetarist conclusions from a non-monetarist model
Journal of Monetary Economics 6 (1980) 121-127. 0 North-Holland Publishing Company
IRREPRESSIBLE MONETARIST CONCLUSIONS FROM A NON-MONETARIST MODEL
Paul D. McNELIS Georgetown University,
Washington. DC 2005 7, USA
This paper presents monetary/fiscal multiplier results from the MPS Econometric Model which give irrepressible monetarist conclusions. Albert Ando’s challenge to monetarists to develop their own model may now be reversed. Weak fiscal policy is supported by the MPS Model and reflects the dominant role of money in the short-run macro economic adjustment process.
1. Introduction
In his analysis of stabilization policy and the structure of the MPS Model, Albert Ando claims that the portfolio readjustment process of his model ‘strengthens rather than weakens the impacts of fiscal policy actions on real and nominal output’ [Ando (1974, p. 568)]. He then challenges monetarists to specify how their model of income determination differs from the one he presented. This note shows that a proper comparison of monetary/fiscal policy ,nultipliers in the MPS Model yields irrepressible monetarist conclusions. With these results Ando’s challenge may be turned around. Fiscalists should now be c 2led upon to differentiate their understanding of income determination and the effect of government expenditures on the economy. The next section is a description of the approach to monetary/fiscal policy comparisons, Section 3 contains the multiplier results and section 4 is the conclusion. 2. A framework for comparing multipliers
In his study of several econometric models Christ (1975) traced the multiplier effects of sustained increases in government expenditures as well as the effects of a once-over increase in money.’ These results are useful for ‘Christ presented the effects of a sustained $1 billion real expenditures increase in one graph, and the effects of a once-over $1 billion increase in unborrowed reserves in another graph (except for the St. Louis Model, where the policy effects were presented_for a $1 billion increase in MI). See Christ (1975, p. 70).
122
P.D. McNelis, Irrepressible morletarist conclusions
comparing the multiplier effects of particular monetary or fiscal policies in alternative econometric models, but they do not provide direct information on the relative multiplier effects of monetary and fiscal policy in each model. In a recent study of monetary macrodynamics Niehans and McNelis pointed out the incomparability of Christ% monetary and fiscal multiplier results, since the increase in money is once-over, while the additional expenditures are recurring [Niehans (1978, p. 253)-j. This note provides direct comparability between monetary and fiscal policies in the MPS Model. The multiplier effects of a once-over money stock increase are compared with the corresponding effects of a one-shot expenditure increase, while the multiplier effects of a sustained expenditure increase are compared with the effects of recurring increases in the money stock.2 To obtain monetary/fiscal multipliers a base run. beginning 1964:3, was generated with the actual money stock and government expenditure levels serving as the poficy variables. The time paths of expenditures and the money stock were then altered by $1 billion in succeeding policy experiments. The differences between the policy-generated real gross output path and the base output path produced the dynamic multiplier paths for alternative monetary and fiscal policies.3 The MPS Model provides a wide variety of stabilization instruments and structural sub-mod&. The ‘money demand’ version of the model, which treats AtI as the exogenous monetary policy instrument, was used to obtain the results in this note. These results of the MPS Model are thus directly comparable with the St. Louis Model multipliers reported by Christ (1975). For fiscal policy nominal federal expenditures were used.4 The multiplier effects of nominal money stock changes are thus compah*edwith the effects of nominal expenditure changes? %Ihrist’s results were also based on an earlier version of the MPS Model. Since then the model has been re-estimated after the 1975 revision of the National Income Accounts. The equations are listed in ‘Quarterly Econometric Model’ (May 1977) obtainable from Wharton Econometric Forecasting Associates. 3According to Blinder and Goldfeld (1976) this approach simply reflects the distinction between impact and dynamic multipliers. In their study they pointed out the influence of nonlinearities on the dynamic multiplier paths. The results presented in this note have been insensitive to numerous changes in the simulation periods for the base run and the policy experiments. 4For the one-shot increase in nominal federal expenditures the policy variable is $1 billion higher than actual nominal expenditures in 1963 :3. Then the policy variable follows the path of actual nominal expenditures. For a sustained increase in government expenditures, the policy variable is $I billion higher than actual nominal expenditures in 1963 :3 and in succeeding quarters in the simulation run. ‘In Christ’s paper the fiscal multipliers are given for sustained increases in real government expenditures, so the results are not directly comparable with the results reported in this paper. However, the peak muitiplier effects of a sustained increase in nominal expenditures are quite close to the multiplier peaks reported by Christ for a sustained increase in real expenditures. See Christ (1975. p. 70).
P.D. Mchielis.
Irrqvessihlu
moneturist
conclusions
123
While only a small fraction of the monetary and fiscal policy instruments in the MPS Model were used for this note, the multiplier effects are representative of the overarching monetarist implications of this model. Alternative policy specifications and sub-versions of the model have reinforced this interpretation of the multiplier results of the MPS model. The representative multiplier results appear in the following section. 3. The dynamic multipliers Fig. 1 depicts the dynamic output multipliers following a one-shot $1 billion increase in government expenditures? The impact multiplier in 1964:3 is about 1.54. In the next period, however. output is only about $0.25 billion higher than base-run output. By the fifth quarter output is actually below the corresponding base-period output. and continues to fall below the base level until the ninth quarter following the policy change. Finally the dynamic multipliers show that the fiscal policy effects have virtually disappeared by the twentieth quarter. Fig. 2 shows the effects of a one-shot $1 billion increase in the money stock.’ The impact effects of the money supply increase are considerably less than the impact effects of the once-over expenditure increase, but by the third quarter the output effect of the new money has more than exceeded the impact effect of the expenditure change. By the seventh quarter output is $7.5 billion higher than the base-level of output. The multipliers then start to fall. and output is below the base-level by tho twelfth quarter. Finally the dynamic multipliers remain nkgative for a considerable not start to increase for another 20 quarters.’
length of time and do
“Fig. 1 gives the multiplier cfTectsof a one-shot $1 billion increase in nominal expenditures on real gross output. In the MPS Model listing, this is variable I. denoted by symbol ‘X’. On the vcrtkal axis of fig. I ‘4 output;.4 expenditures’ should be interpreted as the difference between policy-generated output and base-run output with respect to a one-shot change in nominal expenditures. Since the one-shot nominal expenditure change is $1 billion, the dynamic multipliers in fig. I simply picture the differcncc bctwecn policy-generated output and base-run output for each quarter in the simulation run. -Fig. 2 depicts the multiplier effects of the once-o&cr nominal money stock increase on real gross output. The vertical axis label should be intcrpretcd as the difference between policygenerated output and base-run output with rcspcct to a once-over money stock increase. In this policy experiment the policy variable is $I billion higher than actual nominal money stock in 1963 :3 and in succeeding quarters of the policy run. Since the once-over money stock increase is $1 billion, the multipliers in fig. 2 give the difference bctwet:n the policy-generated output and base-run output for each quarter. “Given the prolonged cycle of the MPS Model the simulation period was not extended long. enough ta obtain a long-run equilibrium multiplier for the money stock increase. Blinder and Goldfeld (1976) proposed a number of truncation procedures for evaluating long-term multipliers in the MPS Model. The truncation procedures involve a number of assumptions about the multiplier path after a certain cut-off simulation period. The dynamic multiplier appearing at the cut-off simulation period can be taken as the final equilibrium multiplier. or the multiplier can be assumed to be 0 one period after the cut-off period. or the dynamic multiplier can be assumed to follow a linear path to zero for a 3 or 4 quarter interval after the cut-off period.
P.D. McNelis, irrepressible monetarist conclusions
124
1963
1965
1967
1969
1971
1973
75
Fig. 1. Dynamic multiplier effects of a once-over $1 billion increase in government expenditures - MPS model.
1963
1965
1967
1969
1971
1973
1975
Fig. 2. Dynamic multiplier effects of a once-over $1 billion increase in the money stock - MPS model.
Y.D. McNulis,
Irrepressible
moneturist
conclusions
125
A comparison of the multiplier effects of the one-shot policy experiments reveals that the fiscal impulse burns out rapidly whereas the money supply change raises real output for almost 3 years. While the fiscal impact multiplier is about 5 times as high as the impact money multiplier, the peak money multiplier turns out to be about 5 times as high as the (impact) fiscal multiplietz9 The peak MPS money multiplier even exceeds the peak money multiplier reported by Christ for the St. Louis Model. These two to three year effects of monetary and fiscal policies thus show the dominating influence of money and the ‘fleeting ripple’ effect of government expenditures. What about the multiplier effects of recurring expenditure changes? Fig. 3 shows that the peak multiplier effect is now higher than its impact effect.” The multiplier reaches a peak of 2.0 three quarters after the policy change. Six quarters later output is actually below its base level. As in the previous monetary experiment, the dynamic multipliers remain negative for a considerable length of time and do not start to increase for another 20 quarters. The peak multiplier effect in fig. 3 is quite close to the multiplier peaks reported by Christ (1975) and Modigliani_-Ando (1976) for maintained increases in real expenditures. However, the time path of the real expenditure multipliers is somewhat different, reaching a peak 5 quarters after the policy change and disappearing (at zero) about 20 quarters after the policy change. How do these multiplier effects compare with the effects of maintained money supply increases ? Fig. 4 depicts the dynamic multipliers resulting from successive $1 billion increases in the stock of money.’ ’ The peak multiplier effect comes about 20 quarters after the policy change and shows an $80 billion increase in income over the base level. The dynamic multipliers fall below zero about 4 quarters later and do not become positive for another 15 quarters. Comparing the multipliers pictured in fig. 3 with fig. 4 the fiscal effect is only a small fraction of the dynamic monetary effects. If observations are restricted to the first 12 quarters, the peak money multiplier is about 15 times the size of the peak fiscal multiplier. If the disagreement
“Whw the cfkc~ of a $1 billion increase in unborrowed reserves was compared with a $1 billion nominal expenditure increase, the ratio of peak multiplier effects was much larger, about 12:1. “‘The vertical axis of fig. 3 should be interpreted to mean the difierence between policyincrease in nominal pcncrutcd output and base-run output with respect to a .srrsldrred eupcndlturc5, Since the sustained incrcasc is $1 billion, the dynamic multipliers give the dilltircncc betwccn policy-gencrutcd output and base-run out put for each quarter in the simulation run. “The vertical axis of fig. 4 should bc intcrpretcd to mean the difierence between policygcncratcd output and base-run output with respect to a recurring increase in the money stock. The rccurrinp increase in the money stock is $1 bilhon, so the policy variable was $1 billion higher than actual A11 in 1963:X $2 billion higher than actual !WI in 1963:4. and increaGngly hiphcr bj an(Bther $1 billion in successive periods. Since the recurring increase is $ I billion. the multiplier path in tip. 4 giics the differcncc between policy-generated output and base-run ~N1tput 111c;tch pcricjd of the ~iniulation fun.
P.D. McNelis, lrrepressihle
128
-2.
I
882
1963
monetarist
conclusions
L
2 1965
2 1967
2
2
1969
1971
2 1973
2 1975
Fig. 3. Dynamic multiplier effects of sustained $1 billion increases in government expenditures - MPS model.
1963
1965
1967
1969
1971
1973
1975
Fig. 4. Dynamic multiplier effects of sustained $1 billion increases in the money stock model.
MPS
P.D. McNelis, irrepressible
monetarist cordusions
127
between monetarists and non-monetarists is perceived as an empirical issue relating to monetary/fiscal multipliers, the MPS Model reflects the dominating role of money in the short-run macroeconomic adjustment process. 4. Conclusion These MPS simulation results have been labeled ‘monetarist’ because they reflect the relative weakness of the effects, dollar for dollar, of fiscal policy relative to monetary policy. Brunner and Meltzer, however, have contended that monetarism, per se, is not a proposition denying any effects of fiscal policy [Brunner and Meltzer (1976, p. 99)]. A non-monetarist model. by implication, does not have to generate strong fiscal effects relative to monetary policy. The conclusion seems inescapable that the relative weakness of fiscal policy may reflect a growing consensus position supported by at least one non-monetarist model of the U.S. economy. References Ando. A., 1974. Some aspects of stabilization policies. the monetarist controversy. and the MPS model, International Economic Review 15. 541 571. Blinder. A. and S.
IRREPRESSIBLE MONETARIST CONCLUSIONS FROM A NON-MONETARIST MODEL
Paul D. McNELIS Georgetown University,
Washington. DC 2005 7, USA
This paper presents monetary/fiscal multiplier results from the MPS Econometric Model which give irrepressible monetarist conclusions. Albert Ando’s challenge to monetarists to develop their own model may now be reversed. Weak fiscal policy is supported by the MPS Model and reflects the dominant role of money in the short-run macro economic adjustment process.
1. Introduction
In his analysis of stabilization policy and the structure of the MPS Model, Albert Ando claims that the portfolio readjustment process of his model ‘strengthens rather than weakens the impacts of fiscal policy actions on real and nominal output’ [Ando (1974, p. 568)]. He then challenges monetarists to specify how their model of income determination differs from the one he presented. This note shows that a proper comparison of monetary/fiscal policy ,nultipliers in the MPS Model yields irrepressible monetarist conclusions. With these results Ando’s challenge may be turned around. Fiscalists should now be c 2led upon to differentiate their understanding of income determination and the effect of government expenditures on the economy. The next section is a description of the approach to monetary/fiscal policy comparisons, Section 3 contains the multiplier results and section 4 is the conclusion. 2. A framework for comparing multipliers
In his study of several econometric models Christ (1975) traced the multiplier effects of sustained increases in government expenditures as well as the effects of a once-over increase in money.’ These results are useful for ‘Christ presented the effects of a sustained $1 billion real expenditures increase in one graph, and the effects of a once-over $1 billion increase in unborrowed reserves in another graph (except for the St. Louis Model, where the policy effects were presented_for a $1 billion increase in MI). See Christ (1975, p. 70).
122
P.D. McNelis, Irrepressible morletarist conclusions
comparing the multiplier effects of particular monetary or fiscal policies in alternative econometric models, but they do not provide direct information on the relative multiplier effects of monetary and fiscal policy in each model. In a recent study of monetary macrodynamics Niehans and McNelis pointed out the incomparability of Christ% monetary and fiscal multiplier results, since the increase in money is once-over, while the additional expenditures are recurring [Niehans (1978, p. 253)-j. This note provides direct comparability between monetary and fiscal policies in the MPS Model. The multiplier effects of a once-over money stock increase are compared with the corresponding effects of a one-shot expenditure increase, while the multiplier effects of a sustained expenditure increase are compared with the effects of recurring increases in the money stock.2 To obtain monetary/fiscal multipliers a base run. beginning 1964:3, was generated with the actual money stock and government expenditure levels serving as the poficy variables. The time paths of expenditures and the money stock were then altered by $1 billion in succeeding policy experiments. The differences between the policy-generated real gross output path and the base output path produced the dynamic multiplier paths for alternative monetary and fiscal policies.3 The MPS Model provides a wide variety of stabilization instruments and structural sub-mod&. The ‘money demand’ version of the model, which treats AtI as the exogenous monetary policy instrument, was used to obtain the results in this note. These results of the MPS Model are thus directly comparable with the St. Louis Model multipliers reported by Christ (1975). For fiscal policy nominal federal expenditures were used.4 The multiplier effects of nominal money stock changes are thus compah*edwith the effects of nominal expenditure changes? %Ihrist’s results were also based on an earlier version of the MPS Model. Since then the model has been re-estimated after the 1975 revision of the National Income Accounts. The equations are listed in ‘Quarterly Econometric Model’ (May 1977) obtainable from Wharton Econometric Forecasting Associates. 3According to Blinder and Goldfeld (1976) this approach simply reflects the distinction between impact and dynamic multipliers. In their study they pointed out the influence of nonlinearities on the dynamic multiplier paths. The results presented in this note have been insensitive to numerous changes in the simulation periods for the base run and the policy experiments. 4For the one-shot increase in nominal federal expenditures the policy variable is $1 billion higher than actual nominal expenditures in 1963 :3. Then the policy variable follows the path of actual nominal expenditures. For a sustained increase in government expenditures, the policy variable is $I billion higher than actual nominal expenditures in 1963 :3 and in succeeding quarters in the simulation run. ‘In Christ’s paper the fiscal multipliers are given for sustained increases in real government expenditures, so the results are not directly comparable with the results reported in this paper. However, the peak muitiplier effects of a sustained increase in nominal expenditures are quite close to the multiplier peaks reported by Christ for a sustained increase in real expenditures. See Christ (1975. p. 70).
P.D. Mchielis.
Irrqvessihlu
moneturist
conclusions
123
While only a small fraction of the monetary and fiscal policy instruments in the MPS Model were used for this note, the multiplier effects are representative of the overarching monetarist implications of this model. Alternative policy specifications and sub-versions of the model have reinforced this interpretation of the multiplier results of the MPS model. The representative multiplier results appear in the following section. 3. The dynamic multipliers Fig. 1 depicts the dynamic output multipliers following a one-shot $1 billion increase in government expenditures? The impact multiplier in 1964:3 is about 1.54. In the next period, however. output is only about $0.25 billion higher than base-run output. By the fifth quarter output is actually below the corresponding base-period output. and continues to fall below the base level until the ninth quarter following the policy change. Finally the dynamic multipliers show that the fiscal policy effects have virtually disappeared by the twentieth quarter. Fig. 2 shows the effects of a one-shot $1 billion increase in the money stock.’ The impact effects of the money supply increase are considerably less than the impact effects of the once-over expenditure increase, but by the third quarter the output effect of the new money has more than exceeded the impact effect of the expenditure change. By the seventh quarter output is $7.5 billion higher than the base-level of output. The multipliers then start to fall. and output is below the base-level by tho twelfth quarter. Finally the dynamic multipliers remain nkgative for a considerable not start to increase for another 20 quarters.’
length of time and do
“Fig. 1 gives the multiplier cfTectsof a one-shot $1 billion increase in nominal expenditures on real gross output. In the MPS Model listing, this is variable I. denoted by symbol ‘X’. On the vcrtkal axis of fig. I ‘4 output;.4 expenditures’ should be interpreted as the difference between policy-generated output and base-run output with respect to a one-shot change in nominal expenditures. Since the one-shot nominal expenditure change is $1 billion, the dynamic multipliers in fig. I simply picture the differcncc bctwecn policy-generated output and base-run output for each quarter in the simulation run. -Fig. 2 depicts the multiplier effects of the once-o&cr nominal money stock increase on real gross output. The vertical axis label should be intcrpretcd as the difference between policygenerated output and base-run output with rcspcct to a once-over money stock increase. In this policy experiment the policy variable is $I billion higher than actual nominal money stock in 1963 :3 and in succeeding quarters of the policy run. Since the once-over money stock increase is $1 billion, the multipliers in fig. 2 give the difference bctwet:n the policy-generated output and base-run output for each quarter. “Given the prolonged cycle of the MPS Model the simulation period was not extended long. enough ta obtain a long-run equilibrium multiplier for the money stock increase. Blinder and Goldfeld (1976) proposed a number of truncation procedures for evaluating long-term multipliers in the MPS Model. The truncation procedures involve a number of assumptions about the multiplier path after a certain cut-off simulation period. The dynamic multiplier appearing at the cut-off simulation period can be taken as the final equilibrium multiplier. or the multiplier can be assumed to be 0 one period after the cut-off period. or the dynamic multiplier can be assumed to follow a linear path to zero for a 3 or 4 quarter interval after the cut-off period.
P.D. McNelis, irrepressible monetarist conclusions
124
1963
1965
1967
1969
1971
1973
75
Fig. 1. Dynamic multiplier effects of a once-over $1 billion increase in government expenditures - MPS model.
1963
1965
1967
1969
1971
1973
1975
Fig. 2. Dynamic multiplier effects of a once-over $1 billion increase in the money stock - MPS model.
Y.D. McNulis,
Irrepressible
moneturist
conclusions
125
A comparison of the multiplier effects of the one-shot policy experiments reveals that the fiscal impulse burns out rapidly whereas the money supply change raises real output for almost 3 years. While the fiscal impact multiplier is about 5 times as high as the impact money multiplier, the peak money multiplier turns out to be about 5 times as high as the (impact) fiscal multiplietz9 The peak MPS money multiplier even exceeds the peak money multiplier reported by Christ for the St. Louis Model. These two to three year effects of monetary and fiscal policies thus show the dominating influence of money and the ‘fleeting ripple’ effect of government expenditures. What about the multiplier effects of recurring expenditure changes? Fig. 3 shows that the peak multiplier effect is now higher than its impact effect.” The multiplier reaches a peak of 2.0 three quarters after the policy change. Six quarters later output is actually below its base level. As in the previous monetary experiment, the dynamic multipliers remain negative for a considerable length of time and do not start to increase for another 20 quarters. The peak multiplier effect in fig. 3 is quite close to the multiplier peaks reported by Christ (1975) and Modigliani_-Ando (1976) for maintained increases in real expenditures. However, the time path of the real expenditure multipliers is somewhat different, reaching a peak 5 quarters after the policy change and disappearing (at zero) about 20 quarters after the policy change. How do these multiplier effects compare with the effects of maintained money supply increases ? Fig. 4 depicts the dynamic multipliers resulting from successive $1 billion increases in the stock of money.’ ’ The peak multiplier effect comes about 20 quarters after the policy change and shows an $80 billion increase in income over the base level. The dynamic multipliers fall below zero about 4 quarters later and do not become positive for another 15 quarters. Comparing the multipliers pictured in fig. 3 with fig. 4 the fiscal effect is only a small fraction of the dynamic monetary effects. If observations are restricted to the first 12 quarters, the peak money multiplier is about 15 times the size of the peak fiscal multiplier. If the disagreement
“Whw the cfkc~ of a $1 billion increase in unborrowed reserves was compared with a $1 billion nominal expenditure increase, the ratio of peak multiplier effects was much larger, about 12:1. “‘The vertical axis of fig. 3 should be interpreted to mean the difierence between policyincrease in nominal pcncrutcd output and base-run output with respect to a .srrsldrred eupcndlturc5, Since the sustained incrcasc is $1 billion, the dynamic multipliers give the dilltircncc betwccn policy-gencrutcd output and base-run out put for each quarter in the simulation run. “The vertical axis of fig. 4 should bc intcrpretcd to mean the difierence between policygcncratcd output and base-run output with respect to a recurring increase in the money stock. The rccurrinp increase in the money stock is $1 bilhon, so the policy variable was $1 billion higher than actual A11 in 1963:X $2 billion higher than actual !WI in 1963:4. and increaGngly hiphcr bj an(Bther $1 billion in successive periods. Since the recurring increase is $ I billion. the multiplier path in tip. 4 giics the differcncc between policy-generated output and base-run ~N1tput 111c;tch pcricjd of the ~iniulation fun.
P.D. McNelis, lrrepressihle
128
-2.
I
882
1963
monetarist
conclusions
L
2 1965
2 1967
2
2
1969
1971
2 1973
2 1975
Fig. 3. Dynamic multiplier effects of sustained $1 billion increases in government expenditures - MPS model.
1963
1965
1967
1969
1971
1973
1975
Fig. 4. Dynamic multiplier effects of sustained $1 billion increases in the money stock model.
MPS
P.D. McNelis, irrepressible
monetarist cordusions
127
between monetarists and non-monetarists is perceived as an empirical issue relating to monetary/fiscal multipliers, the MPS Model reflects the dominating role of money in the short-run macroeconomic adjustment process. 4. Conclusion These MPS simulation results have been labeled ‘monetarist’ because they reflect the relative weakness of the effects, dollar for dollar, of fiscal policy relative to monetary policy. Brunner and Meltzer, however, have contended that monetarism, per se, is not a proposition denying any effects of fiscal policy [Brunner and Meltzer (1976, p. 99)]. A non-monetarist model. by implication, does not have to generate strong fiscal effects relative to monetary policy. The conclusion seems inescapable that the relative weakness of fiscal policy may reflect a growing consensus position supported by at least one non-monetarist model of the U.S. economy. References Ando. A., 1974. Some aspects of stabilization policies. the monetarist controversy. and the MPS model, International Economic Review 15. 541 571. Blinder. A. and S.