Fiscal Multipliers Under an Interest Rate Peg of Deterministic vs. Stochastic Duration
18 Pages Posted: 20 Jun 2012
Date Written: June 2012
Abstract
This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.
Keywords: fiscal multiplier, fixed interest rates, new Keynesian model, zero lower bound
JEL Classification: E32
Suggested Citation: Suggested Citation
Carlstrom, Charles T. and Fuerst, Timothy S. and Paustian, Matthias, Fiscal Multipliers Under an Interest Rate Peg of Deterministic vs. Stochastic Duration (June 2012). FRB of Cleveland Working Paper No. 12-15, Available at SSRN: https://ssrn.com/abstract=2088261
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