Hostname: page-component-76fb5796d-22dnz Total loading time: 0 Render date: 2024-04-26T12:44:14.929Z Has data issue: false hasContentIssue false
  • English
  • Français

FISCAL MULTIPLIERS IN A MONETARY UNION UNDER THE ZERO–LOWER–BOUND CONSTRAINT

Published online by Cambridge University Press:  10 March 2014

Stefanie Flotho
Stefanie Flotho*
Affiliation:
Albert-Ludwigs-Universität Freiburg
*
Address correspondence to: Stefanie Flotho, Institut für allgemeine Wirtschaftsforschung, Abt. Wirtschaftstheorie, Albert-Ludwigs-Universität Freiburg, 79085 Freiburg, Germany; e-mail: stefanie.flotho@vwl.uni-freiburg.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes government spending multipliers in a two-country model of a monetary union with price stickiness and home bias in consumption where monetary policy is constrained by the zero lower bound (ZLB) on the nominal interest rate. Government spending multipliers under this constraint are computed and compared with fiscal multipliers in normal times, that is, where the central bank sets the nominal interest rate via a Taylor rule. The trade elasticity and the parameter measuring home bias in consumption play an important role in determining the size of the multiplier. The multipliers are not necessarily large under the ZLB constraint. However, compared with the fiscal multipliers when the central bank sets the nominal interest rate according to a Taylor rule, the multipliers under the ZLB are bigger. Moreover, the persistence parameter of the binding ZLB plays a crucial role.

Keywords

Fiscal MultipliersMonetary UnionSpilloversZero Lower Bound on Nominal Interest Rates
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1171 - 1194
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Backus, D.K. and Smith, G.W. (1993) Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35 (3–4), 297–316.CrossRefGoogle Scholar
Beetsma, R.M. and Jensen, H. (2004) Mark-up fluctuations and fiscal policy stabilization in a monetary union. In Special Issue. Journal of Macroeconomics 26 (2), 357–376.CrossRefGoogle Scholar
Beetsma, R.M. and Jensen, H. (2005) Monetary and fiscal policy interactions in a micro-founded model of a monetary union. Journal of International Economics 67, 320–352.CrossRefGoogle Scholar
Benigno, P. (2004) Optimal monetary policy in a currency area. Journal of International Economics 63, 293–320.CrossRefGoogle Scholar
Blanchard, O. and Perotti, R. (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quarterly Journal of Economics 117 (4), 1329–1368.CrossRefGoogle Scholar
Calvo, G. (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12 (3), 383–398.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M., and Rebelo, S. (2011) When is the government spending multiplier large? Journal of Political Economy 119 (1), 78–121.CrossRefGoogle Scholar
Clarida, R., Gali, J., and Gertler, M. (2002) A simple framework for international monetary policy analysis. Journal of Monetary Economics 49 (5), 879–904.CrossRefGoogle Scholar
Coenen, G., Erceg, C.J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., de Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabandt, M., and in't Veld, J. (2012) Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics 4 (1), 22–68.Google Scholar
Cogan, J.F., Cwik, T., Taylor, J.B., and Wieland, V. (2010) New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control 34 (3), 281–295.CrossRefGoogle Scholar
Cook, D. and Devereux, M.B. (2011) Optimal fiscal policy in a world liquidity trap. European Economic Review 55 (4), 443–462.CrossRefGoogle Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2008) International risk sharing and the transmission of productivity shocks. Review of Economic Studies 75 (2), 443–473.CrossRefGoogle Scholar
Corsetti, G., Dedola, L., and Leduc, S. (2010) Optimal monetary policy in open economies. In Friedman, B.M. and Woodford, M. (eds.), Handbook of Monetary Economics, Volume 3 of Handbook of Monetary Economics, Chapter 16, pp. 861–933. Amsterdam: Elsevier.Google Scholar
Cwik, T. and Wieland, V. (2011) Keynesian government spending multipliers and spillovers in the euro area. Economic Policy 26 (67), 493–549.CrossRefGoogle Scholar
Eggertsson, G.B. (2010) What fiscal policy is effective at zero interest rates? In NBER Macroconomics Annual 2010, Vol. 25, NBER Chapters, pp. 59–112. National Bureau of Economic Research.Google Scholar
Erceg, C.J. and Lindé, J. (2010) Asymmetric shocks in a currency union with monetary and fiscal handcuffs. In NBER International Seminar on Macroeconomics 2010, NBER Chapters, pp. 95–135. National Bureau of Economic Research.Google Scholar
Farhi, E. and Werning, I. (2012) Fiscal Multipliers: Liquidity Traps and Currency Unions. Working paper 18381, National Bureau of Economic Research.CrossRefGoogle Scholar
Ferrero, A. (2009) Fiscal and monetary rules for a currency union. Journal of International Economics 77 (1), 1–10.CrossRefGoogle Scholar
Fujiwara, I. and Ueda, K. (2013) The fiscal multiplier and spillover in a global liquidity trap. Journal of Economic Dynamics and Control 37 (7), 1264–1283.CrossRefGoogle Scholar
Galí, J. and Monacelli, T. (2008) Optimal monetary and fiscal policy in a currency union. Journal of International Economics 76 (1), 116–132.CrossRefGoogle Scholar
Gomes, S., Jacquinot, P., Mestre, R., and Sousa, J. (2010) Global Policy at the Zero Lower Bound in a Large-Scale DSGE Model. Working paper series 1254, European Central Bank.CrossRefGoogle Scholar
Ilzetzki, E., Mendoza, E.G., and Végh, C.A. (2013) How big (small?) are fiscal multipliers? Journal of Monetary Economics 60 (2), 239–254.CrossRefGoogle Scholar
Kirsanova, T., Leith, C., and Wren-Lewis, S. (2009) Monetary and fiscal policy interaction: The current consensus assignment in the light of recent developments. Economic Journal 119 (541), F482–496.CrossRefGoogle Scholar
Kirsanova, T., Satchi, M., Vines, D., and Wren-Lewis, S. (2007) Optimal fiscal policy rules in a monetary union. Journal of Money, Credit and Banking 39 (7), 1759–1784.CrossRefGoogle Scholar
Mountford, A. and Uhlig, H. (2009) What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24 (6), 960–992.CrossRefGoogle Scholar
Obstfeld, M. and Rogoff, K. (1995) Exchange rate dynamics redux. Journal of Political Economy 103 (3), 624–60.CrossRefGoogle Scholar
Romer, C. and Bernstein, J. (2009) The Job Impact of the American Recovery and Reinvestment Plan. Office of the President-Elect.Google Scholar
Romer, C.D. and Romer, D.H. (2010) The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review 100 (3), 763–801.CrossRefGoogle Scholar
Traum, N. and Yang, S.-C.S. (2011) Monetary and fiscal policy interactions in the post-war U.S. In Special Issue on Monetary and Fiscal Interactions in Times of Economic Stress, European Economic Review 55 (1), 140–164.CrossRefGoogle Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Woodford, M. (2011) Simple analytics of the government expenditure multiplier. American Economic Journal: Macroeconomics 3 (1), 1–35.Google Scholar