THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

Dennis Bonam, Jakob de Haan and Beau Soederhuizen

Macroeconomic Dynamics, 2022, vol. 26, issue 1, 149-185

Abstract: We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:26:y:2022:i:1:p:149-185_6

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