Fiscal Policy Interventions at the Zero Lower Bound

Sabri Boubaker, Duc Khuong Nguyen and Nikos Paltalidis

No 2016-002, Working Papers from Department of Research, Ipag Business School

Abstract: We build on a New Keynesian dynamic stochastic general equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in Eurozone. In this setting, we find that the big four Eurozone economies (France, Germany, Italy and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government-spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound as suggested by Krugman (1998) and modeled by Eggertsson (2010) and Christiano, Eichenbaum and Rebelo (2011). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand supply do not appear to have the same power in the short-run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.

Keywords: Fiscal policy; Liquidity trap; Fiscal multipliers; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E12 E52 E62 E63 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-01-01
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Fiscal policy interventions at the zero lower bound (2018)
Working Paper: Fiscal Policy Interventions at the Zero Lower Bound (2017)
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