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Government expenditure multiplier under the zero lower bound: The role of public investment

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  • Mamedli, Mariam

Abstract

Under the zero lower bound the stimulating policies are conducted mostly by the fiscal authorities due to inefficiency of the traditional monetary policy. Recent research showed that in the borrower-saver framework the government expenditure multiplier can be significantly higher under the zero lower bound than under a positive interest rate. This paper explores the fiscal multiplier in the excess-savings liquidity trap in the extended framework which incorporates productive along with utility-enhancing government expenditures. The share of public investment in total expenditures and its productivity decrease the multiplier under the zero lower bound and increase it under a positive interest rate. In the former case, the higher share of liquidity-constrained borrowers weakens the negative effect of public investment, with an opposite impact in the latter case. An assumption about the two types of public expenditures intensifies the non-linear impact of the borrowers' share on the multiplier: the multiplier can become negative under zero lower bound for the sufficiently high share of borrowers.

Suggested Citation

  • Mamedli, Mariam, 2016. "Government expenditure multiplier under the zero lower bound: The role of public investment," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 103-111.
    • Handle: RePEc:eee:joecas:v:14:y:2016:i:pa:p:103-111
    DOI: 10.1016/j.jeca.2016.07.007
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    1. Idowu, Obakemi Funsho & Okiri, Inyang John & Olarewaju, Hassan Ismail, 2020. "Revisiting Government Expenditure and Private Investment Nexus: An ARDL Approach," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(1), pages 181-192.

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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