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

Sangyup Choi, Junhyeok Shin and Seung Yong Yoo

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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 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)
Pages: 57 pages
Date: 2022-02
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: 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:een:camaaa:2022-19

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