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: https://www.federalreserve.gov/econres/matthias-o-paustian.htm

No 1235, 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. Our explanation rests on a Jensen?s inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models.

Keywords: Business; cycles (search for similar items in EconPapers)
Pages: 21 pages
Date: 2012
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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Working Paper: Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1235

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DOI: 10.26509/frbc-wp-201235

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