Economics, Econometrics and Finance
6 years ago

Government spending shock reduces private consumption, limits economic expansion at zero lower bound.

Macroeconomic Dynamics
HOW CAN THE GOVERNMENT SPENDING MULTIPLIER BE SMALL AT THE ZERO LOWER BOUND?
Valerio Ercolani, João Valle e Azevedo

Paper Summary

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The size of government spending multipliers can be small when interest rates are at zero due to the relationship between private and government consumption. When interest rates are stuck at zero, government spending can crowd out private consumption and limit inflation, reducing the typical boost to the economy. This means that government spending may not have as large of an impact on the economy as previously thought, with output multipliers ranging from 0.8 to 1.6.