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Fiscal Multipliers: Liquidity Traps and Currency Unions

Emmanuel Farhi and Iván Werning

No 18381, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity. However, outside transfers or windfalls can generate larger responses in out- put, whether or not they are spent by the government. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.

JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-mac, nep-opm and nep-pbe
Note: EFG IFM ME
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Citations: View citations in EconPapers (50)

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