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When Is the Government Spending Multiplier Large? (technical) May 9, 2012

Posted by proeconomia in Fiscal policy, Main, On the crisis.

This refers to a recently published paper by Christiano, Eichenbaum and Rebelo at the Journal of Political Economy (Vol. 119, No. 1 (February 2011) (pp. 78-121)). I thought it is interesting since it clearly relates to the problems faced by Greece and Europe, and the effects of potential solutions. Here is the abstract:

“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 the fraction of government spending that occurs while the nominal interest rate is zero, the larger 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.”



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