The fiscal multiplier and spillover in a global liquidity trap

Ippei Fujiwara and Kozo Ueda

No 51, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.

JEL-codes: E52 E62 E63 F41 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Published as: Fujiwara, Ippei and Kozo Ueda (2013), "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," Journal of Economic Dynamics and Control 37 (7): 1264-1283.
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: The fiscal multiplier and spillover in a global liquidity trap (2013)
Working Paper: The Fiscal Multiplier and Spillover in a Global Liquidity Trap (2012)
Working Paper: The Fiscal Multiplier and Spillover in a Global Liquidity Trap (2010)
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