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Simple Analytics of the Government Expenditure Multiplier

  • Michael Woodford

This paper explains the key factors that determine the output multiplier of government purchases in New Keynesian models, through a series of simple examples that can be solved analytically. Sticky prices or wages allow for larger multipliers than in a neoclassical model, though the size of the multiplier depends crucially on the monetary policy response. A multiplier well in excess of one is possible when monetary policy is constrained by the zero lower bound, and in this case welfare increases if government purchases expand to partially fill the output gap that arises from the inability to lower interest rates. (JEL E12, E23, E32, E62, H20, H50)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.1.1
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (January)
Pages: 1-35

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:1-35
Note: DOI: 10.1257/mac.3.1.1
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  12. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
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  17. Christopher Erceg & Jesper Lindé, 2014. "Is There A Fiscal Free Lunch In A Liquidity Trap?," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 73-107, 02.
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  19. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
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