Government spending boosts economy more than expected, study finds.
The article explains how government spending can boost the economy in certain situations. When prices and wages don't adjust quickly, the impact of government purchases on output and employment can be bigger. If the central bank keeps real interest rates steady, the multiplier effect is stronger. But if the central bank raises rates due to inflation, the multiplier effect is smaller. When interest rates are stuck at zero, increasing government spending can help fill the output gap caused by the central bank's inability to lower rates. However, it's crucial that the extra spending and taxes don't last beyond the zero lower bound period.