Government debt, inflation dynamics and the transmission of fiscal policy shocks

Eric Mayer, Sebastian Rüth and Johann Scharler

No 87, W.E.P. - Würzburg Economic Papers from University of Würzburg, Department of Economics

Abstract: We analyze the influence of the fiscal position on the transmission of government spending shocks in a New Keynesian model. We find that once we allow for positive levels of government debt in the steady state, the sign and the size of the fiscal multiplier depend strongly on the horizon at which the multiplier is evaluated. While the long-run effect of a fiscal policy innovation is typically of a similar order of magnitude as in Gali et al. (2007), short-run multipliers differ substantially. The reason for this non-monotonic behavior is the interaction between the dynamics of the inflation rate and the debt level in real terms, which is absent in standard models in which government debt is restricted to be equal to zero in the steady state.

Keywords: fiscal multiplier; New Keynesian model; government debt; inflation (search for similar items in EconPapers)
JEL-codes: E31 E62 H63 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cba and nep-mac
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Related works:
Journal Article: Government debt, inflation dynamics and the transmission of fiscal policy shocks (2013)
Working Paper: Government debt, inflation dynamics and the transmission of fiscal policy shocks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wuewep:87

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