Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia

Timothy S. Hills and Taisuke Nakata

No 2014-107, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9.

Keywords: Fiscal policy; government spending multipliers; interest rate smoothing; liquidity traps; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-11-20
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia (2018)
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