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I think there's actually an important and non-obvious question here. When we talk about the multiplier from additional spending, how are we imagining that distributed over time? https://twitter.com/ernietedeschi/status/1357703237785317380
When you say the multiplier is 1.5, does that mean you think 1) a dollar of public spending raises GDP by $1.50 this year, with no effect on GDP in future years? Or 2) $1.50 this year, plus some amount in future years? Or 3) a total of $1.50, distributed over several years?
If I understand him correctly, @GagnonMacro is using interpretation 1, while @ernietedeschi is using interpretation 3. It's not clear to me that literature on multipliers clearly distinguishes these cases.
Put another way, suppose the baseline case is that we have an output gap of 3 percent both this year and next year. Suppose we think the multiplier is 1.5, and we have additional spending of 2 percent of GDP this year. What do we expect to happen?
1. The output gap is 0 this year, with concomitant full employment. But next year, the output gap and unemployment return to exactly where they would have been without the stimulus. This - again if I understand him correctly - is what @GagnonMacro is arguing.
2. The output gap is 0 this year, and also 0 next year (unless there is some further disturbance.) Or 3. The output gap is somewhere between 0 and 2 both years.
Now that I'm typing this I realize there are actually two (related) questions -- the timeframe that we understand "the multiplier" to apply over, and the persistence or otherwise of the output gap.
