Are government spending shocks inflationary at the zero lower bound? New evidence from daily data

Sangyup Choi, Junhyeok Shin and Seung Yong Yoo

Journal of Economic Dynamics and Control, 2022, vol. 139, issue C

Abstract: Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to a positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB—driven by rising inflation and a falling real interest rate—a model with credit constraints can explain this anomaly.

Keywords: Zero lower bound; High-frequency data; Government spending; Online price index; New Keynesian model; Credit constraints (search for similar items in EconPapers)
JEL-codes: E31 E32 E62 F31 F41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Are government spending shocks inflationary at the zero lower bound? New evidence from daily data (2022)
Working Paper: Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence from Daily Data (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922001294

DOI: 10.1016/j.jedc.2022.104423

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