The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States

We estimate state-dependent government spending multipliers for the United States. We use an Interacted Vector Autoregression (IVAR) model to capture the time-varying monetary policy characteristics including the recent zero interest rate lower bound (ZLB) state. We identify government spending shocks by sign restrictions and use a government spending growth forecast series to account for the effects of anticipated fiscal policy. In our baseline specification we find that government spending multipliers range from 3.4 to 3.7 at the ZLB. Away from the ZLB, multipliers range from 1.5 to 2.7. Next, we address the limited information problem typically inherent in VARs by the help of a Factor-Augmented IVAR (FAIVAR). We find that multipliers are lower in this case, ranging from 2.0 to 2.1 at the ZLB and between 1.5 and 1.8 away from it. Thus, in both specifications we find that multipliers are higher, when the interest rate is lower. Our results are consistent with recent theories that predict larger multipliers at the ZLB.