 IS THERE A FISCAL FREE LUNCH IN A LIQUIDITY TRAP?Christopher Erceg and Jesper Lindé Journal of the European Economic Association, 2014, vol. 12, issue 1, 73-107 Abstract: In this paper, we use a dynamic stochastic general equilibrium model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. However, given this fiscal free lunch, it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jeurec:v:12:y:2014:i:1:p:73-107 Access Statistics for this article Journal of the European Economic Association is currently edited by Fabrizio Zilibotti, Dirk Bergemann, Nicola Gennaioli, Claudio Michelacci and Daniele Paserman More articles in Journal of the European Economic Association from European Economic Association Contact information at EDIRC. |
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