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1 results

  • Government spending multipliers with the Real Cost channel

  • He Nie
  • Journal:
    Macroeconomic Dynamics / Volume 28 / Issue 4 / June 2024
    Published online by Cambridge University Press:
    06 July 2023, pp. 791-812
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  • In the benchmark New Keynesian (NK) model, I introduce the real cost channel to study government spending multipliers and provide simple Markov chain closed-form solutions. This model departs fundamentally from most previous interpretations of the nominal cost channel by flattening the NK Phillips Curve in liquidity traps. At the zero lower bound, I show analytically that following positive government spending shocks, the real cost channel can make inflation rise less than in a model without this channel. This then causes a smaller drop in real interest rates, resulting in a lower output gap multiplier. Finally, I confirm the robustness of the real cost channel’s effect on multipliers using extensions of two models.