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The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap

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  • Jordan Roulleau-Pasdeloup

Abstract

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 small while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 ARRA.

Suggested Citation

  • Jordan Roulleau-Pasdeloup, 2016. "The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap," Cahiers de Recherches Economiques du Département d'économie 16.03, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:16.03
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    Cited by:

    1. Bonciani, Dario & Oh, Joonseok, 2023. "Monetary policy inertia and the paradox of flexibility," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    2. Michau, Jean-Baptiste, 2019. "Monetary and fiscal policy in a liquidity trap with inflation persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 1-28.
    3. Roulleau-Pasdeloup, Jordan, 2020. "Optimal monetary policy and determinacy under active/passive regimes," European Economic Review, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Zero lower bound; New Keynesian; Government spending multiplier;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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