Determinants of Fiscal Multipliers Revisited

Roman Horvath, Lorant Kaszab, Aleš Maršál and Katrin Rabitsch

No 294, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting - invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers.

Keywords: Fiscal multipliers; strategic complementarity; Phillips curve; zero lower bound; New Keynesian model (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://epub.wu.ac.at/7167/ original version (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (https://epub.wu.ac.at/7167/ [308 PERMANENT REDIRECT]--> https://epub.wu.ac.at/id/eprint/7167 [302 FOUND]--> https://research.wu.ac.at/en/publications/571eb1af-3d0b-4750-aa7e-abed4aec9d93)

Related works:
Journal Article: Determinants of fiscal multipliers revisited (2020)
Working Paper: Determinants of Fiscal Multipliers Revisited (2019)
Working Paper: Determinants of Fiscal Multipliers Revisited (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wiw:wus005:7167

Access Statistics for this paper

More papers in Department of Economics Working Paper Series from WU Vienna University of Economics and Business Welthandelsplatz 1, 1020 Vienna, Austria.
Bibliographic data for series maintained by WU Library ().