Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence from Daily Data

Sangyup Choi, Junhyeok Shin and Seung Yong Yoo
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Junhyeok Shin: Johns Hopkins University
Seung Yong Yoo: Yonsei University

No 2021rwp-189, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying a government spending multiplier at the ZLB, empirical evidence has not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline persistently in response to a positive government spending shock at the ZLB. When compared to normal times, government spending shocks are less inflationary and less expansionary at the ZLB. Our finding is difficult to reconcile with the larger fiscal multiplier at the binding ZLB often predicted by standard New Keynesian models via rising inflation and a falling real interest rate. High-frequency developments in consumer confidence, economic policy uncertainty, and oil prices, as well as changes in the component of military spending during the ZLB period, do not explain this anomaly.

Keywords: Zero lower bound; Government spending; Online price index; High-frequency data; New Keynesian model; COVID-19 (search for similar items in EconPapers)
JEL-codes: E31 E32 E62 F31 F41 (search for similar items in EconPapers)
Pages: 41pages
Date: 2021-12
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Are government spending shocks inflationary at the zero lower bound? New evidence from daily data (2022)
Working Paper: Are government spending shocks inflationary at the zero lower bound? New evidence from daily data (2022)
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