Government Spending Multipliers Under the Zero Lower Bound: Evidence from Japan

Abstract

Using a rich data set on government spending forecasts in Japan, we provide new evidence on the effects of unexpected changes in government spending when the nominal interest rate is near the zero lower bound (ZLB). The on-impact output multiplier is 1.5 in the ZLB period, and 0.6 outside of it. We argue that these results are not driven by the amount of slack in the economy. A simple New Keynesian model can reproduce some features of our empirical findings if the ZLB period is caused by a deflationary trap and government spending is not too persistent.

Keywords: fiscal stimulus, government spending, multiplier, zero lower bound

JEL Classification: E32, E5, E62