Money Supply Mechanism And Multiplier Effects Of Fiscal Expenditure

Since the introduction of the economic cycle and Western economic theory, the fiscal policy same as monetary policy become an effective tool to control and regulate the macroeconomy The government implements a balanced budget, issues bond,and put much number of capital investment into the infrastructure, social security and national defense building Meanwhile, the government adjusts the tax ratio,All the measures took by the government are sufficient to show that the policy makers take the fiscal policy as an effective tool to stablize the economic development in China. The government took the fiscal expenditure as one of the most important tools to adjust and control the economic growth,combined with the appropriate money policy.Recently few people took attention on the empirical research about the fiscal multiplier effects .So we tried to discuss the size of the fiscal multiplier and analysis the reason of affecting the size of the fiscal multiplier from aspects of the economic structure and the macroeconomic policy by doing the sensitivity analysis in the DSGE framework.This paper investigates the multiplier effects of government purchases and public investment in a new Keynesian DSGE framework. The results show that the two kinds of government expenditure have small multiplier effects on GDP and little negative effect on private consumption, while obvious negative effect on private investment(crowded out effects so called). We also found that government purchases have larger multiplier effect on the macroeconomic variables than public investment. Meanwhile,the money supply mechanism of managing the output and inflation gap was brought into the model with the stochastic money supply shock.Moreover, the sensitivity analysis suggests that the monetary policy plays a decisive role in fiscal multiplier effects. When the monetary authority relaxes the response of money supply to inflation or strengthens reaction to the GDP gap, the multiplier effects on GDP will be increased significantly, which might exceed one. Meantime government expenditure will crowd in private consumption and private investment. On this account, we consider that fiscal policy needs to cooperate with monetary policy in order to achieve expected economic target.