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Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration

Charles Carlstrom, Timothy Fuerst and Matthias Paustian ()
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Matthias Paustian: Federal Reserve Bank of Cleveland

No 1215, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.

Keywords: Business; cycles (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2012
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