Fiscal Policy, Interest Rate Spreads, and the Zero Lower Bound

42 Pages Posted: 27 Apr 2015

See all articles by Christian Bredemeier

Christian Bredemeier

University of Dortmund - Ruhr Graduate School in Economics

Falko Juessen

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Abstract

This paper questions unconventional fiscal policy effects when the monetary policy rate is at the zero lower bound. We provide evidence for the US that the spread between the policy rate and the US-LIBOR, which is more relevant for private sector transactions, increases with government expenditures. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the fiscal multiplier takes conventional values, regardless of whether the policy rate follows a standard feedback rule or is at its zero lower bound. Likewise, labor tax increases exert contractionary effects in both cases.

Keywords: fiscal multiplier, tax policy, interest rate spreads, zero lower bound, liquidity premium

JEL Classification: E32, E42, E63

Suggested Citation

Bredemeier, Christian and Juessen, Falko and Schabert, Andreas, Fiscal Policy, Interest Rate Spreads, and the Zero Lower Bound. IZA Discussion Paper No. 8993. Available at SSRN: https://ssrn.com/abstract=2598933

Christian Bredemeier (Contact Author)

University of Dortmund - Ruhr Graduate School in Economics ( email )

Hohenzollernstr. 1-3
Essen, NRW 45128
Germany

Falko Juessen

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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