FISCAL MULTIPLIERS IN A MONETARY UNION UNDER THE ZERO–LOWER–BOUND CONSTRAINT

Stefanie Flotho

Macroeconomic Dynamics, 2015, vol. 19, issue 6, 1171-1194

Abstract: This paper analyzes government spending multipliers in a two-country model of a monetary union with price stickiness and home bias in consumption where monetary policy is constrained by the zero lower bound (ZLB) on the nominal interest rate. Government spending multipliers under this constraint are computed and compared with fiscal multipliers in normal times, that is, where the central bank sets the nominal interest rate via a Taylor rule. The trade elasticity and the parameter measuring home bias in consumption play an important role in determining the size of the multiplier. The multipliers are not necessarily large under the ZLB constraint. However, compared with the fiscal multipliers when the central bank sets the nominal interest rate according to a Taylor rule, the multipliers under the ZLB are bigger. Moreover, the persistence parameter of the binding ZLB plays a crucial role.

Date: 2015
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