Is Government Spending at the Zero Lower Bound Desirable?

Florin O. Bilbiie, Tommaso Monacelli, Roberto Perotti

NBER Working Paper No. 20687
Issued in November 2014
NBER Program(s):Monetary Economics, Public Economics

Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. We illustrate this point in the context of a standard New Keynesian model. In that model, when government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20687

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