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Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence From Daily Data

Author

Listed:
  • Sangyup Choi
  • Junhyeok Shin
  • Seung Yong Yoo

Abstract

Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB - driven by rising inflation and a falling real interest rate - a model with credit constraints can explain this anomaly.

Suggested Citation

  • Sangyup Choi & Junhyeok Shin & Seung Yong Yoo, 2022. "Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence From Daily Data," CAMA Working Papers 2022-19, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2022-19
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-05/19_2022_Choi_Shin_Yoo.pdf
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    Cited by:

    1. Gonçalves, Sílvia & Herrera, Ana María & Kilian, Lutz & Pesavento, Elena, 2024. "State-dependent local projections," Journal of Econometrics, Elsevier, vol. 244(2).
    2. J. Ignacio Conde-Ruiz & Manu García & Luis A. Puch & Jesus Ruiz, 2023. "Reforming Dual Labor Markets: “Empirical” or “Contractual” Temporary Rates?," Studies on the Spanish Economy eee2023-36, FEDEA.
    3. Mirza, Nawazish & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Umar, Muhammad, 2023. "Fiscal or monetary? Efficacy of regulatory regimes and energy trilemma of the inflation reduction act (IRA)," International Review of Financial Analysis, Elsevier, vol. 90(C).
    4. Ko, Dong Gyun, 2025. "Did the American Rescue Plan cause inflation? A synthetic control approach," Economic Modelling, Elsevier, vol. 143(C).
    5. Chung, Changwoo & Kim, Jinsoo, 2024. "Greenflation, a myth or fact? Empirical evidence from 26 OECD countries," Energy Economics, Elsevier, vol. 139(C).

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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