publication . Preprint . 2010

Is There a Fiscal Free Lunch in a Liquidity Trap?

Erceg, Christopher; Lindé, Jesper;
Open Access
  • Published: 01 Jan 2010
Abstract
This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this "fiscal free lunch," it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially...
Subjects
mesheuropmc: health care economics and organizations
free text keywords: Monetary policy ; Fiscal policy ; Liquidity (Economics), DSGE Model; Fiscal Policy; Liquidity Trap; Monetary Policy; Zero Bound Constraint, jel:E52, jel:E58

Hall, Robert E. (2009), “How Much Does GDP Rise if the Government Buys More Output?" Manuscript, Stanford University, September 2009.

Taylor, John B. (2007), “The Explanatory Power of Monetary Policy Rules”, working paper, http://www.stanford.edu/~johntayl/.

Uhlig, Harald (2009) “Some Fiscal Calculus" Manuscript, University of Chicago, May 2009.

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publication . Preprint . 2010

Is There a Fiscal Free Lunch in a Liquidity Trap?

Erceg, Christopher; Lindé, Jesper;