Sovereign Risk, Monetary Policy and Fiscal Multipliers: A Structural Model-Based Assessment

68 Pages Posted: 15 Mar 2014

Date Written: November 22, 2013

Abstract

This paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least five years) and there is full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government spending multiplier is much lower. Finally, in all cases tax multipliers are lower than government consumption multipliers.

Keywords: fiscal multiplier, monetary policy, zero lower bound, sovereign risk

JEL Classification: E32, E52, E62

Suggested Citation

Locarno, Alberto and Notarpietro, Alessandro and Pisani, Massimiliano, Sovereign Risk, Monetary Policy and Fiscal Multipliers: A Structural Model-Based Assessment (November 22, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 943. Available at SSRN: https://ssrn.com/abstract=2409011 or http://dx.doi.org/10.2139/ssrn.2409011

Alberto Locarno (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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