The Fiscal Multiplier and Spillover in a Global Liquidity Trap
Crawford School of Economics and Government
Bank of Japan
We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using a standard New Open Economy Macroeconomics (NOEM) model, an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.
Number of Pages in PDF File: 32
Keywords: Zero lower bound, two-country model, fiscal policy, beggar-thy-neighbor
JEL Classification: E52, E62, E63, F41working papers series
Date posted: April 4, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 1.516 seconds