Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia
Timothy S. Hills and
No 2014-107, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9.
Keywords: zero lower bound; liquidity trap; Fiscal policy; interest rate smoothing; government spending multipliers (search for similar items in EconPapers)
JEL-codes: E32 E61 E52 E62 E63 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-11-20, Revised 2014-11-20
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
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Journal Article: Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2014-107
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