A note on the policy implications of the fiscal multiplier

Abstract

We present an elementary analysis of the dynamical aspects of the GDP / government surplus multiplier with relevance to the assessment of a country's debt repayment policy. We show the (at first) counter intuitive result that in order to reduce the Debt/GDP ratio, countries with high Debt to GDP should go into further debt, as long as the Debt to GDP ratio is roughly greater than the inverse of the multiplier. Thus small values of the multiplier make further debt undesirable, and conversely.