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

18 Pages Posted: 20 Jun 2012

See all articles by Charles T. Carlstrom

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Timothy S. Fuerst

University of Notre Dame

Matthias Paustian

Bank of England

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

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

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

Matthias Paustian

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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