Is Government Spending at the Zero Lower Bound Desirable?

Florin Bilbiie, Tommaso Monacelli and Roberto Perotti

No 555, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. We illustrate this point in the context of a standard New Keynesian model. In that model, when government spending provides direct utility to the household, its optimal level is at most 0.5- 1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare- detrimental: it should be kept unchanged at a long run-optimal value. These results are confirmed in a medium-scale DSGE version of the model featuring sticky wages and equilibrium unemployment. Keywords: Government spending multiplier, zero lower bound, welfare. JEL Classification Numbers: E62, D91, E21.

Date: 2015
New Economics Papers: this item is included in nep-dge
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Journal Article: Is Government Spending at the Zero Lower Bound Desirable? (2019)
Working Paper: Is Government Spending at the Zero Lower Bound Desirable? (2014)
Working Paper: Is Government Spending at the Zero Lower Bound Desirable? (2014)
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