Is Government Spending at the Zero Lower Bound Desirable?
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AbstractWe build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually observed in the data, we reach three main results. First, the increase in government consumption after 2008, albeit small in present value terms, was close to optimal. Second, frontloading the same stimulus would have been welfare-improving. Third, larger welfare effects occur in our model for parameter values implying either large welfare costs of modest recessions (e.g., high consumption curvature), or outright large recessions.
CitationBilbiie, Florin O., Tommaso Monacelli, and Roberto Perotti. 2019. "Is Government Spending at the Zero Lower Bound Desirable?" American Economic Journal: Macroeconomics, 11 (3): 147-73. DOI: 10.1257/mac.20150229
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E62 Fiscal Policy
- H50 National Government Expenditures and Related Policies: General
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