The Fiscal Multiplier and Spillover in a Global Liquidity Trap

32 Pages Posted: 4 Apr 2012

See all articles by Ippei Fujiwara

Ippei Fujiwara

Australian National University (ANU) - Crawford School of Public Policy

Kozo Ueda

Waseda University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: April 2012

Abstract

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.

Keywords: Zero lower bound, two-country model, fiscal policy, beggar-thy-neighbor

JEL Classification: E52, E62, E63, F41

Suggested Citation

Fujiwara, Ippei and Ueda, Kozo, The Fiscal Multiplier and Spillover in a Global Liquidity Trap (April 2012). Available at SSRN: https://ssrn.com/abstract=2034153 or http://dx.doi.org/10.2139/ssrn.2034153

Ippei Fujiwara (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building #132 Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Kozo Ueda

Waseda University ( email )

1-104 Totsukamachi, Shinjuku-ku
tokyo, 169-8050
Japan

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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