The marginal propensity to import and multiplier pessimism
This post was written by John McHale
In his comment on Kevin’s vertical disintegration post, John Fitzgearld drew attention to the strong linkage between Irish exports and imports. This got me thinking about Ireland’s marginal propensity to import and its association with, for the want of a better term, multiplier pessimism. On the face of it, there are certainly grounds for pessimism: in recent years imports have been averaging about 80% of GNP! But this tells us little about how much of an increase in domestic demand would leak out in increased imports.
This led me to run an admittedly simple-minded regression of imports on domestic demand and exports. I use quarterly national accounts data (CSO) for the period 1997:Q1 to 2008Q4 that are in constant 2006 euro and seasonally adjusted. I run the regression in first differences. The coefficient on domestic demand is 0.23 (t-stat = 1.9) and the coefficient on exports is 0.60 (t-stat = 5.2); the adjusted R-Squared is 0.48. [FYI: the same regression in levels yields coefficients of 0.16 (t-stat = 1.9) and 0.68 (t-stat = 10.0)].
I present these regression coefficients just as suggestive associations in the data. I’m sure the brainpower on this blog can think of various reasons to doubt a causal interpretation. However, I find the results plausible given the large share of non-traded services in the economy and the input-output relationships noted by John. Are we overdoing the multiplier pessimism?
I hasten to add that I do believe that multipliers are relatively small for an SOE such as Ireland’s; but possibly not that much smaller than the 0.5 that is the rough estimate used by the IMF for SOEs in general. (See the recent useful primer on multipliers recently released by the IMF’s Research Department.)
Of course, there are other reasons for multiplier pessimism in the current environment, notably the impact of increased deficits on interest rate spreads and expectations-related effects on current spending. On the other hand, there are some reasons for (dare-I-say) multiplier optimism: the likelihood that many households and businesses are credit constrained and the fact that monetary policy is almost perfectly accommodative for an SOE that is part of a large monetary union.