Government spending increases widen interest rate spreads at zero lower bound.
The study looks at how government spending affects interest rates when the regular interest rate is stuck at zero. They found that when the government spends more money, the gap between the regular interest rate and a different interest rate widens. This gap influences private sector transactions. Their model shows that increasing government spending has a similar impact on the economy whether the regular interest rate is at zero or not. Also, raising labor taxes has a negative effect on the economy in both scenarios.