Should We Use Linearized Models To Calculate Fiscal Multipliers?

Jesper Lindé and Mathias Trabandt

No 12533, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long-lived liquidity traps.

Keywords: Monetary policy; Fiscal policy; Liquidity trap; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Should we use linearized models to calculate fiscal multipliers? (2018)
Working Paper: Should We Use Linearised Models to Calculate Fiscal Multipliers? (2017)
Working Paper: Should We Use Linearized Models To Calculate Fiscal Multipliers? (2017)
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