Uncertain Policy Regimes and Government Spending Effects

Ruoyun Mao, Wenyi Shen and Shu-Chun Yang

No 22-A004, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show thata moderate inflation- driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers.

Keywords: government spending effects; fiscal multipliers; regime-switching policy; monetary and fiscal policy interaction; nonlinear New Keynesian models (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 E63 H30 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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Journal Article: Uncertain policy regimes and government spending effects (2023)
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