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THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

  • Dennis Bonam (a1), Jakob De Haan (a2) and Beau Soederhuizen (a3)

Abstract

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

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Copyright

This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.

Corresponding author

Address correspondence to: Dennis Bonam, De Nederlandsche Bank, Econometrics and Modeling Department, Westeinde 1, 1017 ZN, Amsterdam, The Netherlands. e-mail: d.a.r.bonam@dnb.nl

Footnotes

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We would like to thank Pascal Jacquinot, Marien Ferdinandusse, and seminar participants at the Fiscal Policies Division of the European Central Bank, the Dutch Economist Day 2017, the Dutch Central Bank, and the IWEEE 2018, as well as three referees for their helpful comments and suggestions on a previous version of the paper. All errors are our own. The views expressed do not necessarily reflect the official position of De Nederlandsche Bank, the Eurosystem, or the CPB Netherlands Bureau of Policy Analysis.

Footnotes

References

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THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

  • Dennis Bonam (a1), Jakob De Haan (a2) and Beau Soederhuizen (a3)

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