When is the government spending multiplier large?

Lawrence Christiano, Martin Eichenbaum, Sergio Rebelo

NBER Working Paper No. 15394
Issued in October 2009, Revised in December 2011
NBER Program(s):Economic Fluctuations and Growth Program

We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger is the fraction of government spending that occurs while the nominal interest rate is zero, the larger is the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w15394

Published: Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121. citation courtesy of

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