The GDP Multiplier for QE

After adding an update to our original post for predicting GDP for the U.S. in the first quarter of 2013 that was based on earlier estimates of the amounts of government spending, tax hikes and quantitative easing taking place in the quarter, we thought the results based upon more final estimates of these quantities deserved a post in their own right.

Here are the values that need to be entered into the tool below to coincide with the actual levels of government spending cuts, expected tax increases and the Fed's quantitative easing that took place in the first quarter of 2013, per the BEA's third estimate for GDP for the quarter and the change in the Fed's total asset holdings over the quarter (as measured by the change in the Fed's total assets from 26 December 2012 to 27 March 2013) and our earlier estimate of the expected increase in tax collections for the quarter:

• Government Spending Cuts (Federal, State, Local): -$24.2 billion


• Expected Tax Collections from Tax Hikes: +$56.3 billion


• Total Federal Reserve Quantitative Easing: +$295.0 billion

We've updated our tool in this post with these values:

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

You shouldn't be surprised to find that we come very close to the BEA's third estimate for GDP in 2013-Q1 of $15,984.1 billion in the tool above with these values, as our tool's results are nearly within 0.05% of it. If the amount of the Fed's quantitative easing in 2013-Q1 totaled up to $303.4 billion, our estimated GDP multiplier of 1.0 for QE would be dead on target.

What that means is that there isn't much of a multiplier effect for the economy from quantitative easing - it basically boosts the economy by $1 for every $1 worth of quantitative easing the Fed does. It does however make a positive contribution to GDP and it can clearly offset the impact of expected fiscal policy shocks.

In fact, as our tool demonstrates, if not for the effect of the Fed's amped up QE program in the first quarter of 2013, we would be discussing the United States' new recession instead.

Image Credit: North Dakota (ND.gov) Youth