The government spending multiplier at the zero lower bound: International evidence from historical data

Abstract

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Effective Fiscal-Monetary Interactions in Severe Recessions

“…More recently, the perceived inability of central banks to hit their targets from below and the slow recovery following the GFC have shifted the debate towards a greater balance in the roles taken by monetary policy and fiscal policy. In particular, the argument that fiscal policy should do more to achieve macroeconomic stability when the central bank is constrained has gained prominence (see e.g., Shambaugh 2019, andKlein andWinkler, 2021). The pandemic has brought renewed attention to the role of fiscal policy as a tool of macroeconomic stabilization (see e.g., Deb et al, 2021).…”

External competition flattens the Phillips Curve

“…7 Using a panel with many countries for a large temporary sample, Klein and Winkler (2018) demonstrate that the public spending multiplier is approximately 1.5 when interest rates remain at, or near, the zero-lower bound, and fall below 1 when economies are out of that context. Miyamoto, Lan Nguyen and Sergeyev (2018) get very similar results for Japan.…”

Constraints and demands on public finances: Considerations of resilient fiscal policy

“…16 Such increases may be difficult to reverse if growth is low and budget deficits are large in the post-shock period (Figure 4). Consequently, high debt may limit the fiscal space which would be available to accommodate future negative shocks and thus undermine the resilience of public finances (Jordà, Schularick and Taylor, 2016 [26]). These limits could be more binding when the pre-shock budget deficit is already large, aggravating the rise in the debt ratio and thus risking spiralling risk premia.…”

“…Effective fiscal frameworks should help ensure that fiscal policy is sufficiently responsive to contingencies and that required state-contingent policies are implemented in a credible way with broad political and social support. 26 In particular, fiscal frameworks should help fiscal policy respond symmetrically to the business cycle, and minimise deficit biases and forecast optimism by changing the incentives of political actors involved in the preparation of the budget. They should also encourage resilience to future uncertainties, for instance by well-chosen indexation rules (Orszag, Rubin and Stiglitz, 2021 [21]).…”