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Fiscal multipliers and policy coordination

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  • Gauti B. Eggertsson

Abstract

This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is \\"goal independent,\\" the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression.

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  • Gauti B. Eggertsson, 2006. "Fiscal multipliers and policy coordination," Staff Reports 241, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:241
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    Cited by:

    1. Tong, Bing & Yang, Guang, 2020. "Interest Rate Pegging, Fluctuations, and Fiscal Policy in China," MPRA Paper 100930, University Library of Munich, Germany.
    2. Philip Arestis, 2011. "Fiscal Policy Is Still an Effective Instrument of Macroeconomic Policy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 143-156, June.
    3. Bing Tong & Guang Yang, 2020. "Interest Rate Pegging, Fluctuations, and Fiscal Policy in China," CFDS Discussion Paper Series 2020/3, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    4. Maria Kazakova & Alexandr Knobel & Ilya Sokolov, 2010. "Quality of VAT administration in OECD countries and Russia. Reform of the Russian system of tax collection," Research Paper Series, Gaidar Institute for Economic Policy, issue 134P.
    5. Alan J. Auerbach & William G. Gale, 2009. "Activist fiscal policy to stabilize economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 327-374.
    6. Matthew Denes & Gauti B. Eggertsson, 2009. "A Bayesian approach to estimating tax and spending multipliers," Staff Reports 403, Federal Reserve Bank of New York.

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    Keywords

    Government spending policy; Fiscal policy; Deficit financing; Monetary policy;
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