Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-26T05:11:46.003Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  03 September 2019

Phuong V. Ngo
Phuong V. Ngo*
Affiliation:
Cleveland State University
*
Address correspondence to: Phuong V. Ngo, Department of Economics, Cleveland State University, 2121 Euclid Avenue, Cleveland, OH 44115, USA. e-mail: [email protected]. Phone: (617) 347 2706. Fax: (216) 687 9206.
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

Government Spending MultiplierZero Lower BoundZLBRotemberg Price AdjustmentRebateNonlinear Method
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 4 , June 2021 , pp. 970 - 997
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank the editor and anonymous referees for useful comments/suggestions. This paper is a substantial revision of a part of my previously circulated working paper entitled “Does Calvo Meet Rotemberg at the Zero Lower Bound?,” coauthored with Jianjun Miao.

References

REFERENCES

Aruoba, B., Cuba-Borda, P. and Schorfheide, F. (2018) Macroeconomic dynamics near the ZLB: A tale of two countries. The Review of Economic Studies 85(1), 87–118.CrossRefGoogle Scholar
Aruoba, B. and Schorfheide, F. (2013) Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria. NBER Working Paper. CrossRefGoogle Scholar
Ascari, G. and Rossi, L. (2012) Trend inflation and firms price-setting: Rotemberg versus Calvo. The Economic Journal 122, 1115–1141.CrossRefGoogle Scholar
Ball, L. (2013). The Case for Four Percent Inflation. Working Paper. Google Scholar
Ball, L. and Mazumder, S. (2011). Inflation Dynamics and the Great Recession. IMF Working Paper. CrossRefGoogle Scholar
Boneva, M. L., Braun, R. A. and Waki, Y. (2016) Some unpleasant properties of loglinearized solutions when the nominal rate is zero. Journal of Monetary Economics 84, 216–232.CrossRefGoogle Scholar
Chen, H., Curdia, V. and Ferrero, A. (2012) The macroeconomic effects of large-scale asset purchase programs. The Economic Journal 122, F289–F315.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M. and Rebelo, S. (2011) When is the government spending multiplier is large? Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Coenen, G., Erceg, C. J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, F., Laxton, D., Linde, J., Mourougane, A., Muir, D., Mursula, S., Resende, C. D., Roberts, J., Roeger, W., Snudden, S., Trabandt, M. and J. in ’t Veld (2012) Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics 4(1), 22–68.Google Scholar
Diewert, E. and Fox, K. (2008) On the estimation of return to scale, technical progress and monopolistic markups. Journal of Econometrics 145, 174–193.CrossRefGoogle Scholar
Dotsey, M., King, R. G. and Wolman, A. L. (1999) State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655–690.CrossRefGoogle Scholar
Eggertsson, B. G. (2009) The Simple Analytics of the Government Spending Multiplier. Federal Reserve Bank of New York Staff Report. Google Scholar
Eggertsson, B. G. and Singh, R. S. (2016) Log-linear Approximation Versus an Exact Solution at the ZLB in the New Keynesian Model. NBER Working Paper. CrossRefGoogle Scholar
Eggertsson, G. (2011) What fiscal policy is effective at zero interest rates. NBER Macroeconomics Annual, 59, 112.Please provide volume no. for reference “Eggertsson (2011)”.CrossRefGoogle Scholar
Eggertsson, G. and Krugman, P. (2012) Debt, deleveraging and the liquidity trap: A Fisher - Minsky - Koo approach. Quarterly Journal of Economics 127(3), 1469–1513.CrossRefGoogle Scholar
Ercolani, V. and Azevedo, J. V. E. (2018) How can the government spending multiplier be small at the zero lower bound? Macroeconomic Dynamics. https://doi.org/10.1017/S1365100517001079.CrossRefGoogle Scholar
Fernandez-Villaverde, J., Gordon, G., Guerron-Quintana, P. and Rubio-Ramirez, F. J. (2015) Nonlinear adventures at the zero lower bound. Journal of Economic Dynamics and Control 57, 182–204.CrossRefGoogle Scholar
Gust, C., Herbst, E., Lopez-Salido, D. and Smith, M. (2017) The empirical implications of the interest-rate lower bound. American Economic Review 107(7), 1971–2006.CrossRefGoogle Scholar
Gust, C., Lopez-Salido, D. and Smith, M. (2012) The Empirical Implications of the Interest-Rate Lower Bound. Federal Reserve Board Working Paper. CrossRefGoogle Scholar
Hall, R. (2009) By how much does GDP rise if the government buys more output? Brooking Papers on Economic Activity 2, 183–231.CrossRefGoogle Scholar
Hills, T. and Nakata, T. (2017) Fiscal multipliers at the zero lower bound: The role of policy inertia. Journal of Money, Credit and Banking (forthcoming). CrossRefGoogle Scholar
Ireland, N. P. (1997) A small, structural, quarterly model for monetary policy evaluation. Carnegie-Rochester Conference Series on Public Policy 47, 83–108.CrossRefGoogle Scholar
Judd, K. L. (1998) Numerical Methods in Economics. Cambridge, Massachusetts, USA: MIT Press.Google Scholar
Judd, L. K., Maliar, L. and Maliar, S. (2011) A cluster-grid algorithm: Solving problems with high dimensionality. Working Paper. CrossRefGoogle Scholar
Koop, G., Pesaran, M. H. and Potter, S. M. (1996) Impulse response analysis in nonlinear multivariate models. Journal of Econometrics 74, 119–147.CrossRefGoogle Scholar
Leeper, E. M., Traum, N. and Walker, T. B. (2017) Clearing up the fiscal multiplier morass. American Economic Review 107(8), 2409–2454.CrossRefGoogle Scholar
Miao, J. and Ngo, P. (2018) Does Calvo meet Rotemberg at the zero lower bound? Macroeconomic Dynamics (forthcoming). CrossRefGoogle Scholar
Miranda, M. J. and Fackler, L. P. (2002) Applied Computational Economics and Finance. Cambridge, Massachusetts, USA: MIT Press.Google Scholar
Mishkin, F. S. (2011) Monetary Policy Strategy: Lessons from the Crisis. NBER Working Paper. CrossRefGoogle Scholar
Mitra, K., Evans, G. W. and Honkapohja, S. (2019) Fiscal policy multipliers in an RBC model with learning. Macroeconomic Dynamics 3(1), 240–283.CrossRefGoogle Scholar
Nakata, T. (2016) Optimal fiscal and monetary policy with occasionally binding zero lower bound. Journal of Economic Dynamics and Control 73, 220–240.CrossRefGoogle Scholar
Ngo, V. P. (2014) Optimal discretionary monetary policy in a micro-founded model with a zero lower bound on nominal interest rate. Journal of Economic Dynamics and Control 45, 44–65.CrossRefGoogle Scholar
Ngo, V. P. (2018) The risk of hitting the zero lower bound and the optimal inflation target. Macroeconomic Dynamics 22(2), 402–425.CrossRefGoogle Scholar
Ramey, V. (2017) Identifying government spending shocks: It’s all in the timing. Quarterly Journal of Economics (forthcoming). Google Scholar
Richter, W. A. and Throckmorton, N. A. (2015) The zero lower bound: Frequency, duration, and numerical convergence. The B.E. Journal of Macroeconomics 15(1), 157–182.CrossRefGoogle Scholar
Rotemberg, J. (1982) Sticky prices in the united states. Journal of Political Economy 90, 1187–211.CrossRefGoogle Scholar
Tauchen, G. and Hussey, R. (1991) Quadrature-based methods for obtaining approximate solutions to nonlinear asset pricing models. Econometrica 59(2), 371–396.CrossRefGoogle Scholar
Wolman, A. (2005) Real implications of the zero bound on nominal interest rates. Journal of Money, Credit and Banking 37(2), 273–296.CrossRefGoogle Scholar
Woodford, M. (2011) Simple analytics of the government expenditure multiplier. American Economic Journal: Macroeconomics 3, 1–35.Google Scholar