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Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation?

Christian Bredemeier, Falko Juessen and Andreas Schabert ()
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Andreas Schabert: University of Cologne, Center for Macroeconomic Research, Albertus-Magnus-Platz, 50931 Cologne, Germany

No 74, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Estimated fiscal multipliers for the US are typically moderate, despite evidence for the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on imperfect substitutability of assets. We document empirically 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 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)
Pages: 58 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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