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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 con rmed in a medium-scale DSGE version of the model featuring sticky wages and equilibrium unemployment. Keywords: Government spending multiplier, zero lower bound, welfare. JEL Classi cation Numbers: E62, D91, E21.

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