scholarly journals Simple Analytics of the Government Expenditure Multiplier

2011 ◽  
Vol 3 (1) ◽  
pp. 1-35 ◽  
Author(s):  
Michael Woodford
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Government Expenditure ◽  
New Keynesian ◽  
Policy Response ◽  
Neoclassical Model ◽  
Key Factors ◽  
Government Purchases ◽  
New Keynesian Models ◽  
The Government

This paper explains the key factors that determine the output multiplier of government purchases in New Keynesian models, through a series of simple examples that can be solved analytically. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary policy response. A multiplier well in excess of one is possible when monetary policy is constrained by the zero lower bound, and in this case welfare increases if government purchases expand to partially fill the output gap that arises from the inability to lower interest rates. (JEL E12, E23, E32, E62, H20, H50)

scholarly journals THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

2020 ◽  
pp. 1-37 ◽  
Author(s):  
Dennis Bonam ◽  
Jakob De Haan ◽  
Beau Soederhuizen
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Government Spending ◽  
New Keynesian ◽  
Panel Var ◽  
Government Investment ◽  
Time To Build ◽  
Low Interest Rates ◽  
New Keynesian Models ◽  
The Government

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

Interpreting the Reagan Deficits

2017 ◽  
Author(s):  
Thomas J. Sargent
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Reagan Administration ◽  
Federal Budget ◽  
Ronald Reagan ◽  
Government Budget ◽  
Government Deficits ◽  
Tax Smoothing ◽  
The Government ◽  
Monetary And Fiscal Policy

This chapter examines the large net-of-interest deficits in the U.S. federal budget that have marked the administration of Ronald Reagan. It explains the fiscal and monetary actions observed during the Reagan administration as reflecting the optimal decisions of government policymakers. The discussion is based on an equation whose validity is granted by all competing theories of macroeconomics: the intertemporal government budget constraint. The chapter first considers the government budget balance and the optimal tax smoothing model of Robert Barro before analyzing monetary and fiscal policy during the Reagan years: a string of large annual net-of-interest government deficits accompanied by a monetary policy stance that has been tight, especially before February 1985, and even more so before August 1982. Indicators of tight monetary policy are high real interest rates on government debt and pretax yields that exceed the rate of economic growth.

scholarly journals Economic Growth, Policies and Influencing Factors: The Case of Albania

2016 ◽  
Vol 4 (1) ◽  
pp. 107
Author(s):  
Eleni Vangjeli ◽  
Anila Mancka
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Empirical Analysis ◽  
Influencing Factors ◽  
Fiscal Policies ◽  
The Government ◽  
High Level ◽  
The Empirical Analysis

Monetary and fiscal policies are two policies that the government could use to keep a high level of growth, with a low inflancion. Fiscal policy has its initial impact on the stock market, while monetary policy in market assets. But, given that the goods and active markets are closely interrelated, both policies, monetary as well as fiscal have impact on the economy, increasing the level of product through the reduction of interest rates. In our paper we will show how functioning monetary and fiscal policies. But also in our paper we will analyze the different factors which have affected the economic growth of the country. The focus of our study is the graphical and empirical analysis of economic growth, policies and influencing factors. For the empirical analysis we have used data on the economic growth in Albania for 1996– 2014.

scholarly journals Monetary and Macroprudential Policy with Endogenous Risk

2020 ◽  
Vol 20 (236) ◽  
Author(s):  
Tobias Adrian ◽  
Fernando Duarte ◽  
Nellie Liang ◽  
Pawel Zabczyk
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Risk Taking ◽  
New Keynesian ◽  
Output Gap ◽  
Macroprudential Policy ◽  
Endogenous Risk ◽  
Nk Model ◽  
Risk Return ◽  
Financial Conditions

We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via their impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.

Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination

2015 ◽  
Vol 29 (1) ◽  
pp. 289-344 ◽  
Author(s):  
Hess Chung ◽  
Edward Herbst ◽  
Michael T. Kiley
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
New Keynesian Models ◽  
Policy Strategies

scholarly journals REAL RIGIDITIES AND OPTIMAL STABILIZATION AT THE ZERO LOWER BOUND IN NEW KEYNESIAN ECONOMIES

2017 ◽  
Vol 23 (4) ◽  
pp. 1371-1400 ◽  
Author(s):  
Adiya Belgibayeva ◽  
Michal Horvath
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Wage Setting ◽  
Optimal Stabilization ◽  
Labor Market Segmentation ◽  
Policy Responses ◽  
New Keynesian Models

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Monetary easing may quicken in Brazil this year

2017 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Recession ◽  
Government Debt ◽  
Domestic Demand ◽  
Private Debt ◽  
Content Type ◽  
Positive Effects ◽  
The Government

Significance At its first meeting of 2017, on January 10-11, the COPOM reduced the benchmark Selic interest rate to 13%. The 75-basis-point (bp) rate cut decision, the largest in nearly five years, accelerated the monetary easing cycle that started in October 2016. Economic recession has been relieving inflationary pressures and opening room for more intense cuts in interest rates. Impacts Further reductions of interest rates may contribute to controlling government debt. Private debt renegotiations at lower interest rates may facilitate a recovery in domestic demand and output. Any positive effects of monetary policy on activity may help contain popular dissatisfaction with the government.

scholarly journals Industry Evidence on the Effects of Government Spending

2011 ◽  
Vol 3 (1) ◽  
pp. 36-59 ◽  
Author(s):  
Christopher J Nekarda ◽  
Valerie A Ramey
Keyword(s):  
Government Spending ◽  
Returns To Scale ◽  
Transmission Mechanism ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Neoclassical Model ◽  
Government Purchases ◽  
Keynesian Model ◽  
Constant Returns To Scale ◽  
Shed Light

This paper investigates the effects of government purchases at the industry level in order to shed light on the transmission mechanism for government spending on the aggregate economy. We create a new panel dataset that matches output and labor variables to industry-specific shifts in government demand. An increase in government demand raises output and hours, lowers real product wages and labor productivity, and has no effect on the markup. The estimates also imply approximately constant returns to scale. The findings are more consistent with the effects of government spending in the neoclassical model than the textbook New Keynesian model. (JEL E12, E23, E62, H50)

Wicksell after Woodford

2006 ◽  
Vol 28 (2) ◽  
pp. 171-185 ◽  
Author(s):  
Mauro Boianovsky ◽  
Hans-Michael Trautwein
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
New Keynesian ◽  
General Level ◽  
Credit System ◽  
Nominal Interest Rates ◽  
Cumulative Processes ◽  
Sectoral Composition ◽  
Output Gaps

The New Neoclassical Synthesis that Michael Woodford puts forward in his Interest and Prices (2003) is primarily a synthesis of New Classical and New Keynesian ideas. Yet Woodford presents it as an encompassing approach that goes much further back in time to integrate the pre-Keynesian macroeconomics of Knut Wickseil and his followers. Starting with the title, the book contains many references to Geldzins und Güterpreise (1898), Wicksell's landmark contribution to monetary theory which was translated as Interest and Prices in 1936. Woodford relates his concept of a “monetary policy without money” to Wicksell's concept of the pure credit system and to Wicksell's proposal to eliminate inflation by adjusting nominal interest rates to changes in the price level—an idea that has much in common with modern policy rules à la Taylor. He presents the core model of the new synthesis (in shorthand: IS + AS + Taylor rule) as a “neo-Wicksellian framework” that serves to analyze the dynamics of interest-rate gaps and output gaps (2003, chapter 4). Referring to the Wicksellians of the 1920s and 1930s (primarily Erik Lindahl, Gunnar Myrdal, and Friedrich A. Hayek), Woodford grounds his advocacy of rules to fight inflation on the potential non-neutrality of monetary policy: “[I]t is because instability of the general level of prices causes substantial real distortions—leading to inefficient variation both in aggregate employment and output and in the sectoral composition of economic activity—that price stability is important” (2003, p. 5). He thus sees his analysis of interest-rate and output gaps as “an attempt to resurrect a view” that the old Wicksellians had developed in their analyses of cumulative processes.

scholarly journals Analysis of the Viability of Fiscal and Monetary Policies on the Recovery of Household Consumption Expenditures Because of the Covid-19 Pandemic

2021 ◽  
Vol 3 (1) ◽  
Author(s):  
Fahrul Riza ◽  
William Wiriyanata
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Government Spending ◽  
Positive Impact ◽  
Household Consumption ◽  
Series Data ◽  
Consumption Expenditure ◽  
Consumption Expenditures ◽  
Long Run ◽  
The Government

The Covid-19 outbreak disrupted economic activity in almost all countries. The Indonesian economy entered a recession phase as a result of the continued contraction in economic growth in the second and third quarters of 2020. According to Keynesian economic theory, the combination of fiscal policy and monetary policy was more effective in recovering the economy from the crisis, this study aims to measure the effect of government spending, money supply, inflation and interest rates on aggregate household consumption expenditure. This study used a quantitative method, using monthly time series data from January 2015 to December 2020. The data were analyzed using the Vector Error Correction Model (VECM). The results show that government spending has a negative impact on household aggregate expenditure in the long run meanwhile interest rate has a positive impact on household consumption expenditure. Inflation do not affect aggregate household consumption expenditure, both in the short and long term. The results of the analysis are useful for evaluating the policies taken by the government to overcome the economic crisis due to the spread of the Covid-19 outbreak. The government increases aggregate expenditure to cover the decline in household aggregate consumption expenditure due to a decrease in household real income. Then expansionary monetary policy in the long run will increase aggregate demand. Therefore, the Ministry of Finance together with Bank Indonesia needs to design other policies that will have a positive impact on economic recovery in the short term. This study has not included other macro indicators that affect household consumption expenditures such as unemployment, taxes and the household marginal propensity to saving (MPS). Keywords: Household Aggregate Expenditure; Government Expenditure; Inflation; VECM

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