Analytics of the government expenditure multiplier with QE

Vito Polito (), Paulo Santos Monteiro () and Mike Wickens ()
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Vito Polito: School of Economics, University of Sheffield, Sheffield S10 2TU, UK
Paulo Santos Monteiro: Department of Economics and Related Studies, University of York, UK
Mike Wickens: Cardiff University, University of York, CEPR, CESifo, UK

No 2025011, Working Papers from The University of Sheffield, Department of Economics

Abstract: This paper analyses the government expenditure multiplier at the zero lower bound (ZLB) in the presence of quantitative easing (QE), using a tractable New Keynesian model with financial frictions. We show that sufficiently large exogenous QE can lift the economy off the ZLB, thus yielding multipliers below one even for a small fiscal stimulus. Pre-commitment to a gradual QE unwinding further reduces the fiscal stimulus needed to keep multipliers below unity. When QE instead follows an instrument rule that responds to conventional monetary shortfalls, the multiplier can remain below one even at the ZLB. This result also holds under an optimally designed, welfare-based QE policy. Our analysis provides theoretical support for the growing empirical evidence that government spending multipliers can remain below unity at the ZLB.

Keywords: Government expenditure multiplier; Zero lower bound; Quantitative easing (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2025-11
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