Fiscal Policy Interventions at the Zero Lower Bound

Posted: 4 Mar 2017 Last revised: 15 Oct 2018

See all articles by Sabri Boubaker

Sabri Boubaker

University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion

Duc Khuong Nguyen

IPAG Business School

Nikos Paltalidis

Durham University Business School

Date Written: February 26, 2017

Abstract

We build on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone. In this setting, we find that the big four eurozone economies (France, Germany, Italy, and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound, as suggested by Krugman (1998). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.

Keywords: Fiscal Policy; Liquidity Trap; Fiscal Multipliers; Zero Lower Bound

JEL Classification: E12; E52; E62; E63

Suggested Citation

Boubaker, Sabri and Nguyen, Duc Khuong and Paltalidis, Nikos, Fiscal Policy Interventions at the Zero Lower Bound (February 26, 2017). Journal of Economic Dynamics and Control, Vol. 93, pp. 297-314, August 2018 , Available at SSRN: https://ssrn.com/abstract=2926429 or http://dx.doi.org/10.2139/ssrn.2926429

Sabri Boubaker

University Paris-Est Créteil (UPEC) - Institut de Recherche en Gestion ( email )

61 Avenue du General de Gaulle
94010 Creteil
France

HOME PAGE: http://www.irg.u-pec.fr/enseignant.php?num=58

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Nikos Paltalidis (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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