Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-23T06:32:35.586Z Has data issue: false hasContentIssue false
  • English
  • Français

THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

Published online by Cambridge University Press:  14 August 2020

Dennis Bonam ,
Jakob De Haan  and
Beau Soederhuizen
Dennis Bonam*
Affiliation:
De Nederlandsche Bank, VU Amsterdam
Jakob De Haan
Affiliation:
De Nederlandsche Bank, University of Groningen and CESifo
Beau Soederhuizen
Affiliation:
Netherlands Bureau for Economic Policy Analysis, Nyenrode Business University
*
Address correspondence to: Dennis Bonam, De Nederlandsche Bank, Econometrics and Modeling Department, Westeinde 1, 1017 ZN, Amsterdam, The Netherlands. e-mail: [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Keywords

Fiscal multipliersEffective lower boundPanel VAR
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 1 , January 2022 , pp. 149 - 185
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2020

Footnotes

We would like to thank Pascal Jacquinot, Marien Ferdinandusse, and seminar participants at the Fiscal Policies Division of the European Central Bank, the Dutch Economist Day 2017, the Dutch Central Bank, and the IWEEE 2018, as well as three referees for their helpful comments and suggestions on a previous version of the paper. All errors are our own. The views expressed do not necessarily reflect the official position of De Nederlandsche Bank, the Eurosystem, or the CPB Netherlands Bureau of Policy Analysis.

References

REFERENCES

Albertini, J., Poirier, A. and Roulleau-Pasdeloup, J. (2014) The composition of government spending and the multiplier at the zero lower bound. Economics Letters 122(1), 31–35.10.1016/j.econlet.2013.10.021CrossRefGoogle Scholar
Almunia, M., Benetrix, A., Eichengreen, B., O’Rourke, K. H. and Rua, G. (2010) From great depression to great credit crisis: Similarities, differences and lessons. Economic Policy 25(62), 219–265.10.1111/j.1468-0327.2010.00242.xCrossRefGoogle Scholar
Amendola, A., Di Serio, M. and Fragetta, M. (2018) The Government Spending Multiplier at the Zero Lower Bound: Evidence from the Euro Area, CELPE Discussion Papers 153.10.2139/ssrn.3423369CrossRefGoogle Scholar
Aruoba, S. B., Cuba-Borda, P. and Schorfheide, F. (2018) Macroeconomic dynamics near the ZLB: A tale of two equilibria. Review of Economic Studies 85, 87–118.10.1093/restud/rdx027CrossRefGoogle Scholar
Auerbach, A. J. and Gorodnichenko, Y. (2012a) Fiscal multipliers in recession and expansion. In: Alesina, A. and Giavazzi, F. (eds.), Fiscal Policy after the Financial crisis, Chicago: University of Chicago Press, pp. 63–98.Google Scholar
Auerbach, A. J. and Gorodnichenko, Y. (2012b) Measuring the output responses to fiscal policy. American Economic Journal: Economic Policy 4(2), 1–27.Google Scholar
Baxter, M. and King, R. G. (1993) Fiscal policy in general equilibrium. American Economic Review 83(3), 315–334.Google Scholar
Beetsma, R. and Giuliodori, M. (2011) The effects of government purchases shocks: Review and estimates for the EU. The Economic Journal 121(550), 4–32.10.1111/j.1468-0297.2010.02413.xCrossRefGoogle Scholar
Beetsma, R., Giuliodori, M. and Klaassen, F. (2008) The effects of public spending shocks on trade balances and budget deficits in the European Union. Journal of the European Economic Association 6(2–3), 414–423.10.1162/JEEA.2008.6.2-3.414CrossRefGoogle Scholar
Blanchard, O. and Perotti, R. (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quarterly Journal of Economics 117, 1329–1368.10.1162/003355302320935043CrossRefGoogle Scholar
Blanchard, O. J. and Quah, D. (1993) The dynamic effects of aggregate demand and supply disturbances. American Economic Review 83(3), 653–658.Google Scholar
Blinder, A., Ehrman, M., de Haan, J. and Jansen, D. (2017) Necessity as the mother of invention: Monetary policy after the crisis. Economic Policy 32(92), 707–755.10.1093/epolic/eix013CrossRefGoogle Scholar
Boehm, C. E. (2019) Government consumption and investment: Does the composition of purchases affect the multiplier? Journal of Monetary Economics (forthcoming).10.1016/j.jmoneco.2019.05.003CrossRefGoogle Scholar
Boneva, L. M., Anton Braun, R. and Waki, Y. (2016) Some unpleasant properties of loglinearized solutions when the nominal rate is zero. Journal of Monetary Economics 84, 216–232.10.1016/j.jmoneco.2016.10.012CrossRefGoogle Scholar
Bouakez, H., Guillard, M. and Roulleau-Pasdeloup, J. (2017) Public investment, time to build, and the zero lower bound. Review of Economic Dynamics 23, 60–79.10.1016/j.red.2016.09.001CrossRefGoogle Scholar
Broner, F., Clancy, D., Martin, A. and Erce, A. (2018) Fiscal Multipliers and Foreign Holdings of Public Debt, Working Paper No. 30, European Stability Mechanism.10.2139/ssrn.3153111CrossRefGoogle Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.10.1016/0304-3932(83)90060-0CrossRefGoogle Scholar
Canzoneri, M., Collard, F., Dellas, H. and Diba, B. (2016) Fiscal multipliers in recessions. The Economic Journal 126(590), 75–108.10.1111/ecoj.12304CrossRefGoogle Scholar
Carlstrom, C. T., Fuerst, T. S. and Paustian, M. (2014) Fiscal multipliers under an interest rate peg of deterministic versus stochastic duration. Journal of Money, Credit and Banking 46(6), 1293–1312.10.1111/jmcb.12141CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L. (1999) Monetary policy shocks: What have we learned and to what end? In: Taylor, J. and Woodford, M. (eds.), Handbook of Macroeconomics, Vol. 1, Amsterdam: Elsevier, pp. 65–148.Google Scholar
Christiano, L., Eichenbaum, M. and Rebelo, S. (2011) When is the government spending multiplier large? Journal of Political Economy 119(1), 78–121.10.1086/659312CrossRefGoogle Scholar
Coenen, G., Erceg, C. J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., De Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabandt, M. and in’t Veld, J. (2012) Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics 4(1), 22–68.Google Scholar
Cogan, J. F., Cwik, T., Taylor, J. B. and Wieland, V. (2010) New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control 34(3), 281–295.10.1016/j.jedc.2010.01.010CrossRefGoogle Scholar
Corsetti, G., Meier, A. and Müller, G. J. (2012) What determines government spending multipliers? Economic Policy 27(72), 521–565.10.1111/j.1468-0327.2012.00295.xCrossRefGoogle Scholar
Crafts, N. and Mills, T. C. (2013) Rearmament to the rescue? New estimates of the impact of “Keynesian” policies in 1930s’ Britain. The Journal of Economic History 73(4), 1077–1104.Google Scholar
Davig, T. and Leeper, E. M. (2011) Monetary-fiscal policy interactions and fiscal stimulus. European Economic Review 55(2), 211–227.10.1016/j.euroecorev.2010.04.004CrossRefGoogle Scholar
De Castro, F. and Hernández de Cos, P. (2008) The economic effects of fiscal policy: The case of Spain. Journal of Macroeconomics 30(3), 1005–1028.10.1016/j.jmacro.2007.08.009CrossRefGoogle Scholar
Draghi, M. (2014) Unemployment in the euro area, Speech by Mario Draghi, President of the ECB. In: Annual Central Bank Symposium in Jackson Hole, Vol. 22, Federal Reserve Bank of Kansas City.Google Scholar
Drautzburg, T. and Uhlig, H. (2015) Fiscal stimulus and distortionary taxation. Review of Economic Dynamics 18(4), 894–920.10.1016/j.red.2015.09.003CrossRefGoogle Scholar
Dupor, B. and Li, R. (2015) The expected inflation channel of government spending in the postwar US. European Economic Review 74, 36–56.10.1016/j.euroecorev.2014.11.004CrossRefGoogle Scholar
Eggertsson, G. B. (2011) What fiscal policy is effective at zero interest rates? In: Acemoglu, D. and Woodford, M. (eds.), NBER Macroeconomics Annual 2010, Vol. 25, Chicago: University of Chicago Press, pp. 59–112.Google Scholar
Ellahie, A. and Ricco, G. (2017) Government purchases reloaded: Informational insufficiency and heterogeneity in fiscal VARs. Journal of Monetary Economics 90, 13–27.10.1016/j.jmoneco.2017.06.002CrossRefGoogle Scholar
Erceg, C. and Lindé, J. (2014) Is there a fiscal free lunch in a liquidity trap? Journal of the European Economic Association 12(1), 73–107.CrossRefGoogle Scholar
Fatás, A. and Mihov, I. (2001) The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence, CEPR Discussion Papers 2760.Google Scholar
Fernández-Villaverde, J., Gordon, G., Guerrón-Quintana, P. and Rubio-Ramirez, J. F. (2015) Nonlinear adventures at the zero lower bound. Journal of Economic Dynamics and Control 57, 182–204.10.1016/j.jedc.2015.05.014CrossRefGoogle Scholar
Fernández-Villaverde, J., Guerrón-Quintana, P. and Rubio-Ramírez, J. F. (2014) Supply-side policies and the zero lower bound. IMF Economic Review 62(2), 248–260.10.1057/imfer.2014.10CrossRefGoogle Scholar
Fischer, S. (2016) Longer-Term Challenges for the US Economy, Speech at “A Conversation with Stanley Fischer”, sponsored by the Council on Foreign Relations, New York, New York, November 21, 2016.Google Scholar
Forni, M. and Gambetti, L. (2010) Fiscal Foresight and the Effects of Goverment Spending, CEPR Discussion Papers 7840.Google Scholar
Guerrieri, L. and Iacoviello, M. (2015) Occbin: A toolkit for solving dynamic models with occasionally binding constraints easily. Journal of Monetary Economics 70, 22–38.10.1016/j.jmoneco.2014.08.005CrossRefGoogle Scholar
Hall, R. E. (2009) By How Much Does GDP Rise if the Government Buys More Output? NBER Working Paper 15496.10.3386/w15496CrossRefGoogle Scholar
Hebous, S. (2011) The effects of discretionary fiscal policy on macroeconomic aggregates: A reappraisal. Journal of Economic Surveys 25(4), 674–707.10.1111/j.1467-6419.2010.00659.xCrossRefGoogle Scholar
Hills, T. S. and Nakata, T. (2018) Fiscal multipliers at the zero lower bound: The role of policy inertia. Journal of Money, Credit and Banking 50(1), 155–172.10.1111/jmcb.12456CrossRefGoogle Scholar
Ilzetzki, E., Mendoza, E. G. and Végh, C. A. (2013) How big (small?) are fiscal multipliers?. Journal of Monetary Economics 60(2), 239–254.CrossRefGoogle Scholar
IMF (2017) Seeking Sustainable Growth: Short-term Recovery, Long-Term Challenges, World Economic Outlook, International Monetary Fund.Google Scholar
Ji, Y. and Xiao, W. (2016) Government spending multipliers and the zero lower bound. Journal of Macroeconomics 48, 87–100.10.1016/j.jmacro.2016.03.002CrossRefGoogle Scholar
Jordà, Ò. (2005) Estimation and inference of impulse responses by local projections. American Economic Review 95(1), 161–182.10.1257/0002828053828518CrossRefGoogle Scholar
Kiley, M. T. (2016) Policy paradoxes in the New Keynesian model. Review of Economic Dynamics 21, 1–15.10.1016/j.red.2016.03.002CrossRefGoogle Scholar
Klein, M. and Winkler, R. (2018) The Government Spending Multiplier at the Zero Lower Bound: International Evidence from Historical Data, Working Papers 2018001, University of Antwerp.Google Scholar
Leeper, E. M., Traum, N. and Walker, T. B. (2017) Clearing up the fiscal multiplier morass. American Economic Review 107(8), 2409–2454.10.1257/aer.20111196CrossRefGoogle Scholar
Leeper, E. M., Walker, T. B. and Yang, S.-C. S. (2010) Government investment and fiscal stimulus. Journal of Monetary Economics 57(8), 1000–1012.10.1016/j.jmoneco.2010.09.002CrossRefGoogle Scholar
Leeper, E. M., Walker, T. B. and Yang, S.-C. S. (2013) Fiscal foresight and information flows. Econometrica 81(3), 1115–1145.Google Scholar
Mertens, K. R. S. M. and Ravn, M. O. (2014) Fiscal policy in an expectations-driven liquidity trap. The Review of Economic Studies 81(4), 1637–1667.10.1093/restud/rdu016CrossRefGoogle Scholar
Miyamoto, W., Nguyen, T. L. and Sergeyev, D. (2018) Government spending multipliers under the zero lower bound: Evidence from Japan. American Economic Journal: Macroeconomics 10(3), 247–277.Google Scholar
Morita, H. (2015) Japanese Fiscal Policy Under the Zero Lower Bound of Nominal Interest Rates: Time-Varying Parameters Vector Autoregression, IER Discussion Paper 627, Institute of Economic Research Hitotsubashi University.Google Scholar
Mountford, A. and Uhlig, H. (2009) What are the effects of fiscal policy shocks?. Journal of Applied Econometrics 24(6), 960–992.10.1002/jae.1079CrossRefGoogle Scholar
Perotti, R. (2008) In search of the transmission mechanism of fiscal policy. In: Acemoglu, D., Rogoff, K. and Woodford, M. (eds.), NBER Macroeconomics Annual, Vol. 22, University of Chicago Press, pp. 169–226.Google Scholar
Qazizada, W. and Stockhammer, E. (2015) Government spending multipliers in contraction and expansion. International Review of Applied Economics 29(2), 238–258.10.1080/02692171.2014.983053CrossRefGoogle Scholar
Ramey, V. A. (2011) Identifying government spending shocks: It’s all in the timing. The Quarterly Journal of Economics 126(1), 1–50.10.1093/qje/qjq008CrossRefGoogle Scholar
Ramey, V. A. and Zubairy, S. (2018) Government spending multipliers in good times and in bad: Evidence from US historical data. Journal of Political Economy 126(2), 850–901.10.1086/696277CrossRefGoogle Scholar
Roulleau-Padeloup, J. (2018) The government spending multiplier in a (mis) managed liquidity trap. Journal of Money, Credit and Banking 50(2–3), 293–315.10.1111/jmcb.12461CrossRefGoogle Scholar
Stock, J. H. and Watson, M. W. (2001) Vector autoregressions. The Journal of Economic Perspectives 15(4), 101–115.10.1257/jep.15.4.101CrossRefGoogle Scholar
Uhlig, H. (2010) Some fiscal calculus. American Economic Review 100(2), 30–34.CrossRefGoogle Scholar
Woodford, M. (2011) Simple analytics of the government expenditure multiplier. American Economic Journal: Macroeconomics 3(1), 1–35.Google Scholar
Yang, S.-C. S. (2005) Quantifying tax effects under policy foresight. Journal of Monetary Economics 52(8), 1557–1568.10.1016/j.jmoneco.2004.09.003CrossRefGoogle Scholar
Yang, S.-C. S. (2007) Tentative evidence of tax foresight. Economics Letters 96(1), 30–37.10.1016/j.econlet.2006.12.006CrossRefGoogle Scholar
Supplementary material: PDF

Bonam et al. supplementary material

Bonam et al. supplementary material

Download Bonam et al. supplementary material(PDF)
PDF 1.1 MB