The Dynamic Multiplier

Abstract

The Keynesian models relate to short-period equilibrium. When something is changed, e.g. when government spending or the propensity to save increase, one equilibrium position can be compared with another as a matter of comparative statics. But, as Keynes saw them, the models contain no dynamic elements; strictly speaking, there is no Keynesian macro-economic dynamics. No provision is made for an analysis of processes through time—even of the processes of inflation or deflation—and there is no link between one period and the next. The rate of interest might provide such a link, but in fact it is used only to reduce expectations of the future to a present value applicable to the current period. This extreme simplification is made possible by the assumption of a period so short that the capital stock K can be treated as constant and there is no need to write investment as I = dK/dt or I^t = K^t+1 − K^t.