Working Paper: NBER ID: w15394
Authors: Lawrence Christiano; Martin Eichenbaum; Sergio Rebelo
Abstract: We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger is the fraction of government spending that occurs while the nominal interest rate is zero, the larger is the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.
Keywords: government spending; multiplier; zero lower bound; macroeconomics
JEL Codes: E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending (H59) | Output (Y10) |
| Government spending (H59) | Expected inflation (E31) |
| Expected inflation (E31) | Real interest rate (E43) |
| Real interest rate (E43) | Private spending (H59) |
| Timing of government spending (E62) | Effectiveness of fiscal policy (E62) |
| Zero lower bound (E49) | Government spending multiplier (E62) |