Fiscal Mulipliers: Liquidity Traps and Currency Unions
69 Pages Posted: 7 Sep 2012
Date Written: August 31, 2012
We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity. However, outside transfers or windfalls can generate larger responses in output, whether or not they are spent by the government. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.
JEL Classification: E62
Suggested Citation: Suggested Citation