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Fiscal Multipliers in the Liquidity Trap: International Theory and Evidence

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  • Johannes Wieland

    (University of California, Berkeley)

Abstract

In a small open economy New Keynesian model without capital, the size of the fiscal multiplier is above 1, if and only if the terms of trade deteriorate in response to a fiscal expansion. I test whether the terms of trade exhibit this deterioration in the liquidity trap and find that the data reject this hypothesis. While the fiscal multiplier in the liquidity trap must be less than 1 in the baseline model, within a large open economy with capital, the estimated terms of trade response is consistent with a fiscal multiplier up to 1.26 in the liquidity trap.

Suggested Citation

  • Johannes Wieland, 2010. "Fiscal Multipliers in the Liquidity Trap: International Theory and Evidence," 2010 Meeting Papers 717, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:717
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