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Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation?

Author

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  • Christian Bredemeier
  • Falko Juessen
  • Andreas Schabert

    (UniversityofCologne,CenterforMacroeconomicResearch,Albertus-Magnus-Platz,50931Cologne, Germany)

Abstract

Estimated fiscal multipliers for the US are typically moderate, despite evidence for the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on imperfect substitutability of assets. We document empirically that interest rates important for private borrowing/saving do not follow the response of the monetary policy rate, which is reflected by rising liquidity premia after spending hikes. A model with a structural specification of asset liquidity can replicate these findings and predicts moderate output effects fiscal expansions even when monetary policy rates fall or are fixed at the zero lower bound.

Suggested Citation

  • Christian Bredemeier & Falko Juessen & Andreas Schabert, 2021. "Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation?," ECONtribute Discussion Papers Series 074, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:074
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    1. Christian Bayer & Benjamin Born & Ralph Luetticke, 2020. "The Liquidity Channel of Fiscal Policy," CESifo Working Paper Series 8374, CESifo.

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    More about this item

    Keywords

    Fiscal multiplier; monetary policy; real interest rates; liquidity premium; zero lower bound;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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

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