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Fiscal multipliers are not necessarily that large: a comment on Eggertsson (2010)

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  • Lorant, Kaszab

Abstract

This paper comments on Eggertsson (2010a) who argued that some fiscal policy measures like an increase in government spending or sales tax cut can be very effective in the recent peculiar environment of zero Federal Funds rate in the US. In particular, we show that the size of multipliers depends on the type of factor market structure (economy-wide or specific) we assume. Regarding the robustness of the results of Eggertsson (2010a) we argue that multipliers under zero nominal interest rate are a magnitude higher than those with positive interest only if the fiscal stimulus is sufficiently long (around ten years under specific labor market). Our work confirms and extends the results of Christiano (2010) who questioned the quantitative nature of the wage tax hike multiplier of Eggertsson (2010a).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35612.

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Date of creation: 30 Sep 2011
Date of revision: 16 Dec 2011
Handle: RePEc:pra:mprapa:35612

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Keywords: iscal policy; multipliers; homogenous factor market; heterogenous factor market; zero nominal interest;

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  1. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2010. "New Keynesian versus old Keynesian government spending multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 281-295, March.
  2. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  3. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Gauti Eggertsson, 2010. "The paradox of toil," Staff Reports 433, Federal Reserve Bank of New York.
  6. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  7. Rochelle M. Edge, 2000. "The equivalence of wage and price staggering in monetary business cycle models," International Finance Discussion Papers 672, Board of Governors of the Federal Reserve System (U.S.).
  8. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2010. "Corrigendum to "New Keynesian versus old Keynesian government spending multipliers" [J. Econ. Dynam. Control 34(3) (2010) 281-295]," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2229-2229, October.
  9. Rochelle M. Edge, 2001. "Online Appendix to "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models"," Technical Appendices edge01, Review of Economic Dynamics.
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Cited by:
  1. Kaszab, Lorant, 2012. "Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound," Cardiff Economics Working Papers E2012/13, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2013.

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