Working Paper: CEPR ID: DP10210
Authors: Florin Bilbiie; Tommaso Monacelli; Roberto Perotti
Abstract: Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. When government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.
Keywords: government spending; multiplier; welfare; zero lower bound
JEL Codes: D91; E21; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased government spending (H59) | Limited welfare benefits (I38) |
| Depth of recession (E32) | Limited effectiveness of government spending (E62) |
| Wasteful government spending (H59) | Zero welfare benefits (I38) |