Uncertain policy regimes and government spending effects

Ruoyun Mao, Wenyi Shen and Shu-Chun Yang

European Economic Review, 2023, vol. 152, issue C

Abstract: Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show that a moderate inflation-driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers.

Keywords: Government spending effects; Fiscal multipliers; Regime-switching policy; Monetary and fiscal policy interaction; Nonlinear new keynesian models (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 E63 H30 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:152:y:2023:i:c:s0014292122002100

DOI: 10.1016/j.euroecorev.2022.104330

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