Working Paper: NBER ID: w20687
Authors: Florin O. 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. We illustrate this point in the context of a standard New Keynesian model. In that model, 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; Zero Lower Bound; Welfare Effects
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 |
|---|---|
| government spending (H59) | output (C67) |
| output (C67) | real interest rate (E43) |
| real interest rate (E43) | consumption (E21) |
| output multiplier (E23) | welfare effects (D69) |
| government spending (H59) | optimal increase in government spending (E62) |
| wasteful government spending (H56) | welfare effect (D69) |
| optimal level of wasteful spending (D61) | welfare effect (D69) |