How Can the Government Spending Multiplier Be Small at the Zero Lower Bound?

2018 ◽  
Author(s):  
Valerio Ercolani ◽  
Jooo Valle e Azevedo
Keyword(s):  
Lower Bound ◽  
Government Spending ◽  
Zero Lower Bound ◽  
The Government

FISCAL MULTIPLIERS AT THE ZERO LOWER BOUND: THE ROLE OF GOVERNMENT SPENDING PERSISTENCE

2019 ◽  
pp. 1-28 ◽  
Author(s):  
Phuong V. Ngo
Keyword(s):  
Lower Bound ◽  
Government Spending ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Role Of Government ◽  
Fiscal Multipliers ◽  
The Great Recession ◽  
Resource Cost ◽  
The Government

In this paper, I examine the role of government spending persistence on fiscal multipliers at the zero lower bound (ZLB) in a more realistic environment while keeping the model simple enough to identify mechanisms driving the result. In particular, I build on a standard dynamic New Keynesian (DNK) model with an occasionally binding ZLB and Rotemberg pricing with rebates, where the probability of hitting the ZLB and the government purchase shock are in line with US data. Moreover, I compute the multiplier in a state that mimics the Great Recession. The main findings of the paper are as follows: (1) the multiplier is non-monotonic in the persistence of government spending while the economy is at the ZLB; (2) given the persistence estimated from US data, the multiplier is 1.25; and (3) in the framework with perfect foresight or with aggregate resource cost for adjusting prices, the multiplier is around 1 or less.

scholarly journals Resolving New Keynesian Anomalies with Wealth in the Utility Function

2019 ◽  
pp. 1-46 ◽  
Author(s):  
Pascal Michaillat ◽  
Emmanuel Saez
Keyword(s):  
Lower Bound ◽  
Utility Function ◽  
Social Status ◽  
Government Spending ◽  
Marginal Utility ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Low Levels

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source—which resolves all the anomalies.

scholarly journals Is Government Spending at the Zero Lower Bound Desirable?

2019 ◽  
Vol 11 (3) ◽  
pp. 147-173 ◽  
Author(s):  
Florin O. Bilbiie ◽  
Tommaso Monacelli ◽  
Roberto Perotti
Keyword(s):  
Lower Bound ◽  
Great Recession ◽  
Government Spending ◽  
Welfare Effects ◽  
Zero Lower Bound ◽  
Present Value ◽  
Government Consumption ◽  
High Consumption ◽  
The Us ◽  
Parameter Values

We build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually observed in the data, we reach three main results. First, the increase in government consumption after 2008, albeit small in present value terms, was close to optimal. Second, frontloading the same stimulus would have been welfare-improving. Third, larger welfare effects occur in our model for parameter values implying either large welfare costs of modest recessions (e.g., high consumption curvature), or outright large recessions. (JEL E12, E32, E43, E62, H50)

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