The IMF estimate is much less than the multiplier reported in a paper released last year by Christina Romer of the President’s Council of Economic Advisers and Jared Bernstein of the Vice President’s Office. The attached graph shows how huge the difference is. It shows the impact on GDP of a one percentage point permanent increase in government purchases as a share of GDP reported in the IMF paper (labeled GIMF) and in the Administration paper (labeled Romer-Bernstein).
John Cogan, Volker Wieland, Tobias Cwik and I raised questions about Romer-Bernstein paper soon after it was released last year because the estimates seemed to be much different from comparable estimates based on more modern new Keynesian models. We classified the Romer-Bernstein estimates as old Keynesian. Since then many technical papers have been written on this subject, of which a recent paper by Michael Woodford is the most comprehensive in my view. The IMF model is of the new Keynesian variety and adds more evidence of the huge policy differences between new Keynesian and old Keynesian models.