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'Fiscal policy, interest rate spreads, and the zero lower bound'

Detail Summary
Date 16 March 2016
Time 16:00 - 17:30
Location Roeterseilandcampus - gebouw M


Abstract: This paper examines the role of monetary policy for macroeconomic effects of fiscal policy. We show that market interest rates contain relevant information for fiscal vector autoregressions, which is not included in the federal funds rate. We find that the spread between the US-LIBOR and the latter increases significantly in response to government spending shocks. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the fiscal multiplier takes conventional values also at the zero lower bound in contrast to the unconventionally large multipliers predicted by standard New Keynesian models. Likewise, labor tax increases exert contractionary effects also at the ZLB.


REC M3.02

Roeterseilandcampus - gebouw M
Roeterseilandcampus - gebouw M

Plantage Muidergracht 12
1018 TV Amsterdam