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The Government Spending Multiplier in a (Mis)Managed Liquidity Trap
Author(s) -
ROULLEAUPASDELOUP JORDAN
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.12461
Subject(s) - liquidity trap , zero lower bound , economics , new keynesian economics , government spending , multiplier (economics) , monetary economics , trap (plumbing) , shock (circulatory) , keynesian economics , monetary policy , market liquidity , inflation (cosmology) , empirical evidence , government (linguistics) , nominal interest rate , macroeconomics , real interest rate , liquidity risk , market economy , physics , medicine , philosophy , linguistics , epistemology , meteorology , theoretical physics , welfare
I study the impact of a government spending shock in a New Keynesian model when monetary policy is set optimally. In this framework, the economy is at the zero lower bound but expectations are well managed by the central bank. As such, the multiplier effect of government spending increases on expected inflation is close to zero while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 American Recovery and Reinvestment Act.