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The Fiscal Multiplier and Spillover in a Global Liquidity Trap

Ippei Fujiwara and Kozo Ueda

No 10-E-03, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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.

Keywords: Zero lower bound; two-country model; fiscal policy; beggar-thy-neighbor (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 F41 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-cba and nep-mac
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Related works:
Journal Article: The fiscal multiplier and spillover in a global liquidity trap (2013) Downloads
Working Paper: The Fiscal Multiplier and Spillover in a Global Liquidity Trap (2012) Downloads
Working Paper: The fiscal multiplier and spillover in a global liquidity trap (2010) Downloads
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