Fiscal Multipliers Under an Interest Rate Peg of Deterministic vs. Stochastic Duration

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