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The government spending multiplier at the zero lower bound: International evidence from historical data

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  • Mathias Klein
  • Roland Winkler

Abstract

Based on a large historical panel dataset, this paper provides evidence that the government spending multiplier can be significantly higher when interest rates are at or near the zero lower bound (ZLB). We estimate multipliers that are as high as 1.5 during ZLB episodes but small and statistically indistinguishable from zero during normal times. Our results are robust to different definitions of ZLB episodes, alternative ways of identifying government spending shocks, controlling for the exchange rate regime, and other potentially important state variables. In particular, we show that the difference in multipliers is not driven by multipliers being higher during periods of economic slack.

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  • Mathias Klein & Roland Winkler, 2021. "The government spending multiplier at the zero lower bound: International evidence from historical data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(6), pages 744-759, September.
  • Handle: RePEc:wly:japmet:v:36:y:2021:i:6:p:744-759
    DOI: 10.1002/jae.2835
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    2. Amendola, Adalgiso & Di Serio, Mario & Fragetta, Matteo & Melina, Giovanni, 2020. "The euro-area government spending multiplier at the effective lower bound," European Economic Review, Elsevier, vol. 127(C).
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    6. Wilhelm, Stefan, 2023. "Efficiency of short-time work schemes and the role of monetary policy," Journal of Macroeconomics, Elsevier, vol. 78(C).
    7. Dubravko Mihaljek, 2021. "Interactions between fiscal and monetary policies: a brief history of a long relationship," Public Sector Economics, Institute of Public Finance, vol. 45(4), pages 419-432.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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