When is the Government Spending Multiplier Large?

Federal Reserve Bank of Atlanta CQER Working Paper No. 10-01

55 Pages Posted: 23 Sep 2010

See all articles by Lawrence J. Christiano

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2010

Abstract

We argue that the government spending multiplier can be very large when the nominal interest rate is constant. We focus on a natural case in which the interest rate is constant, which is when the zero lower bound on nominal interest rates binds. For the economies that we consider it is optimal to increase government spending in response to shocks that make the zero bound binding.

Keywords: multiplier, zero bound, deflation spiral

JEL Classification: E3, E4, E5, H3

Suggested Citation

Christiano, Lawrence J. and Eichenbaum, Martin and Tavares Rebelo, Sergio, When is the Government Spending Multiplier Large? (August 2010). Federal Reserve Bank of Atlanta CQER Working Paper No. 10-01. Available at SSRN: https://ssrn.com/abstract=1680616 or http://dx.doi.org/10.2139/ssrn.1680616

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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