Reconceptualizing the Multiplier: The Role of Animal Spirits

Despite numerous empirical papers aiming at assessing the size of the multiplier, there has been very rare attempts at improving the theory of the multiplier. And yet, it has several shortcomings: investment expectations (‘animal spirits’) play almost no role, while they are central in Keynes’s theory of business cycles, and it fails to account for numerous stylized facts (why the multiplier is higher during recessions, and higher for fiscal changes than for expenditures, etc.). Whereas most papers on the topic focus on the state-dependency of the multiplier, none did so by building on animal spirits. Therefore, the contribution of this paper is twofold: offering a theoretical proposal of the role played by animal spirits in GDP changes by drawing on the empirical insights of other scientific disciplines, explaining the stylized facts that are unaccounted for by the extant literature.