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Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia
Author(s) -
HILLS TIMOTHY S.,
NAKATA TAISUKE
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12456
Subject(s) - zero lower bound , economics , recession , government spending , fiscal policy , keynesian economics , monetary economics , multiplier (economics) , fiscal multiplier , shadow (psychology) , monetary policy , inertia , inflation (cosmology) , macroeconomics , welfare , market economy , psychology , physics , classical mechanics , theoretical physics , psychotherapist
The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends, which in turn damps the expansionary effects of the government spending during the recession via expectations. In our baseline experiment intended to capture the effectiveness of the American Recovery and Reinvestment Act of 2009, the output multiplier at the ZLB is 1.9 when the weight on the lagged shadow rate is zero, and 0.5 when the weight is 0.85.