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Why are fiscal multipliers moderate even under monetary accommodation?

Christian Bredemeier, Falko Juessen and Andreas Schabert

European Economic Review, 2022, vol. 141, issue C

Abstract: Estimated fiscal multipliers for the US are typically moderate, despite evidence of the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on the imperfect substitutability of assets. We find that interest rates important for private borrowing/saving do not follow the response of the monetary policy rate, which is reflected by rising liquidity premia after spending hikes. A model with a structural specification of asset liquidity can replicate these findings and predicts moderate output effects of fiscal expansions even when monetary policy rates fall or are fixed at the zero lower bound.

Keywords: Fiscal multiplier; Monetary policy; Real interest rates; Liquidity premium; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E42 E63 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002531

DOI: 10.1016/j.euroecorev.2021.103970

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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