Now then, now then. this is something of a spanner in hte works for that lovely traditional Keynesianism that billions of our money are being spent upon.
Everything depends on the size of the multiplier. Trust me on that one, OK?
A low multiplier (or heaven forfend, a negative one) means we shouldn\’t do the stimulus spending. A high one means perhaps we should. So, does the UK have a high or a low one?
The degree of exchange rate flexibility is a critical
determinant of the size of fiscal multipliers.
Economies operating under predetermined
exchange rate regimes have long-run multipliers
of around 1.5, but economies with flexible
exchange rate regimes have essentially zero multipliers.
We\’ve a flexible exchange rate, as the bouncing pounds shows. So we\’ve got a low multiplier.
The degree of openness to trade (measured as
exports plus imports as a proportion of GDP) is
another critical determinant.1 Relatively closed
economies have long-run multipliers of around
1.6, but relatively open economies have very
small or zero multipliers.
Their definition of open is if imports plus exports is more than 60% of the economy. No, for the UK this isn\’t quite true.
But we do have a flexible exhcnage rate, so perhaps fiscal stimulus won\’t work and thus we shouldn\’t be doing it?
One way of looking at this might be as with tax incidence but in reverse. Capital taxes can only be shed by capitalists onto others if it\’s an open economy: maybe Keyneisanism only works in a closed(ish) economy with fixed exchange rates? Actually, in something like the economy that Keynes was writing about?