Fiscal Multipliers: Liquidity Traps and Currency Unions

70 Pages Posted: 15 Sep 2012 Last revised: 21 Sep 2012

See all articles by Emmanuel Farhi

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2012

Abstract

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 out- put, 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.

Suggested Citation

Farhi, Emmanuel and Werning, Ivan, Fiscal Multipliers: Liquidity Traps and Currency Unions (September 2012). NBER Working Paper No. w18381, Available at SSRN: https://ssrn.com/abstract=2147092

Emmanuel Farhi (Contact Author)

Harvard University - Department of Economics ( email )

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

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