The Multiplier, Sovereign Default Risk, and the US Budget: An Overview

My remarks will first summarize an attempt I have made to integrate default risk into the multiplier analysis as a means of identifying proper policy under conditions of high deficits, high unemployment, and default risk (Cline in The multiplier, sovereign default risk, and the US budget. Peterson Institute for International Economics, Washington, 2012a). I will argue that whether the gains from fiscal adjustment will outweigh the losses from induced Keynesian contraction will depend on the immediacy and severity of the sovereign credit risk problem, if any, and on the size of the Keynesian multiplier given the state of the business cycle. My remarks will then conclude with observations about the political economy of the US “fiscal cliff” looming at the end of this year, based on a more recent paper (Cline in Restoring fiscal equilibrium in the United States. Peterson Institute for International Economics, Washington, 2012b).