Is fiscal expansion more effective in a financial crisis?

After the Great Recession, the Keynesian expansionary policy has been regarded as an effective measure, especially under imperfect financial market conditions. Among literature related to fiscal policy in financial crises, Fernández-Villaverde (2010) suggests that the fiscal policy multiplier increases in a financial crisis through the Fisher effect. However, we should note that the author simply compared the multiplier computed in the standard new Keynesian dynamic stochastic general equilibrium (DSGE) with that in the DSGE with financial accelerator settings. As the financial accelerator is considered effective during both financial crises and normal financial conditions, the author’s comparison should be considered insignificant for showing a greater multiplier in the financial crisis. In this study, to make the exact comparison, we first estimate parameters regarding the Fisher effect under each regime separately and then compute and compare the estimated fiscal multipliers using these 2 estimates in the same DSGE model. Using Japanese financial data that provide enough observations under the good and bad regimes of financial conditions, we find that fiscal multipliers are smaller in the bad regime than in the good regime.