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When Is the Government Spending Multiplier Large?

Lawrence Christiano, Martin Eichenbaum and Sergio Rebelo
Journal of Political Economy
Vol. 119, No. 1 (February 2011), pp. 78-121
DOI: 10.1086/659312
Stable URL: http://www.jstor.org/stable/10.1086/659312
Page Count: 44
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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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