Multiplier effects in the Maltese economy
This essay is basically a simple explanation of how a number of macroeconomic variables influence, and are themselves influenced by other variables, through a series of chain reactions called multiplier effects. It is primarily intended for students of economics at sixth form and undergraduate level, and for government officials involved in economic planning and macroeconomic decision making. In many text-books of economics, multiplier analysis is often presented in an oversimplified manner, giving the impression that multipliers can actually be measured by means of a diagram comprising consumption and investment expenditures, and income. On the other hand, texts on advanced economic theory tend to introduce complicated specifications, which are very difficult to interprete and often impossible to estimate. This study takes a middle-of-the-road approach. The specifications of economic relationships are kept as simple as possible. At the same time, however, the reader is made aware that macroeconomic multiplier effects are the result of a considerable amount of induced interactions between economic variables. The reason for opting for simple specifications is mainly to enable even the beginner to follow the arguments of the text. This study is not intended to be a text-book of advanced macroeconomic theory, and the reader is advised to look elsewhere for more complex formulations of economic relationships. An important feature of this study is that the macroeconomic multipliers are not presented only as abstract concepts, but are computed on the basis of information pertaining to the Maltese economy. Perhaps the most difficult part of this study is the actual estimation of the multiplier effects, and the simulation exercises based on these estimations. A step by step explanation of all the computational work involved is however given, and this should enable the reader to understand the procedures used. Special knowledge of mathematics and econometrics are not required to follow the presentation. Economic relationships are presented in mathematical form, but care is always taken to complement this with an explanation which is not formally mathematical. Most of the computational work is removed from the main text and placed in a technical appendix at the back. This was done so as not to burden the reader with too much detail during the development of the main arguments of the study. ; peer-reviewed
