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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.
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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

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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.

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