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When Is the Government Spending Multiplier Large?

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Author Info

  • Lawrence Christiano
  • Martin Eichenbaum
  • Sergio Rebelo

Abstract

We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger the fraction of government spending that occurs while the nominal interest rate is zero, the larger the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/659312
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File URL: http://www.jstor.org/stable/full/10.1086/659312
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 119 (2011)
Issue (Month): 1 ()
Pages: 78 - 121

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Handle: RePEc:ucp:jpolec:doi:10.1086/659312

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  1. Eberly, Janice & Rebelo, Sérgio & Vincent, Nicolas, 2008. "Investment and Value: A Neoclassical Benchmark," CEPR Discussion Papers 6737, C.E.P.R. Discussion Papers.
  2. R. Anton Braun & Yuichiro Waki, 2005. "Monetary Policy during Japan's Lost Decade," CARF F-Series CARF-F-035, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. On the ineffectiveness of a fiscal stimulus
    by Economic Logician in Economic Logic on 2012-01-09 15:16:00
  2. To log-linearize or not to log-linearize?
    by Economic Logician in Economic Logic on 2012-10-22 15:00:00
  3. Monetary or fiscal stimulus can help only if unemployment is cyclical; otherwise, if unemployment is structural expansionary policies will lead only to inflation. Careful recent analyses indicate that unemployment is mainly cyclical in the US
    by Blog Admin in British Politics and Policy at LSE on 2012-10-24 16:00:33
  4. Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing
    by Blog Admin in British Politics and Policy at LSE on 2012-10-25 13:00:36
  5. Quelle est la taille du multiplicateur budgétaire ?
    by ? in D'un champ l'autre on 2014-01-17 21:59:00
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