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The Output Effects of (Non-Separable) Government Consumption at the Zero Lower Bound

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  • Valerio Ercolani
  • João Valle e Azevedo

Abstract

We investigate the reaction of output to government spending shocks at the zero lower bound (ZLB) on the nominal interest rate when government and private consumption are non-separable in preferences. In particular, substitutability between private and government consumption significantly reduces the otherwise large output multipliers obtained at the ZLB. Additionally, the coupling of substitutability with a debt-stabilizing fiscal rule can generate negative output multipliers on impact.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201310.

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Date of creation: 2013
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Handle: RePEc:ptu:wpaper:w201310

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  1. Shu-Chun S. Yang & Nora Traum, 2010. "Monetary and Fiscal Policy Interactions in the Post-War U.S," IMF Working Papers 10/243, International Monetary Fund.
  2. Valerio Ercolani & João Valle e Azevedo, 2012. "The Effects of Public Spending Externalities," Working Papers, Banco de Portugal, Economics and Research Department w201210, Banco de Portugal, Economics and Research Department.
  3. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, Elsevier, vol. 46(2), pages 281-313, October.
  4. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
  5. Eric M. Leeper & Michael Plante & Nora Traum, 2009. "Dynamics of Fiscal Financing in the United States," NBER Working Papers 15160, National Bureau of Economic Research, Inc.
  6. Ahmed, Shaghil, 1986. "Temporary and permanent government spending in an open economy: Some evidence for the United Kingdom," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(2), pages 197-224, March.
  7. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
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