Is Government Spending at the Zero Lower Bound Desirable?

57 Pages Posted: 21 Oct 2014

See all articles by Florin Ovidiu Bilbiie

Florin Ovidiu Bilbiie

University of Oxford

Tommaso Monacelli

Bocconi University - Department of Economics

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Date Written: October 2014

Abstract

Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. When government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.

Keywords: government spending multiplier, welfare, zero lower bound

JEL Classification: D91, E21, E62

Suggested Citation

Bilbiie, Florin Ovidiu and Monacelli, Tommaso and Perotti, Roberto, Is Government Spending at the Zero Lower Bound Desirable? (October 2014). CEPR Discussion Paper No. DP10210. Available at SSRN: https://ssrn.com/abstract=2512738

Florin Ovidiu Bilbiie (Contact Author)

University of Oxford ( email )

Oxford
United Kingdom

Tommaso Monacelli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Roberto Perotti

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
431
PlumX Metrics