Economic Brief

August 2011, No. 11-08

Is Stimulative Fiscal Policy More Effective at the Zero Lower Bound?

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Several recent research efforts have found that stimulative fiscal policy — government spending or tax cuts — can have unusual effects when nominal interest rates are as low as they are today. In particular, some studies have found that the government spending "multiplier" can be much larger at the zero lower bound. Despite these results, some caution is due when interpreting the size of the fiscal multiplier.

Additional Resources

Athreya, Kartik B., and Renee Courtois, "Recent Fiscal Policy and the Manipulation of Aggregate Economic Activity," Federal Reserve Bank of Richmond Economic Brief 09-08, August 2009.

Braun, R. Anton, and Lena Mareen Körber, "New Keynesian Dynamics in a Low Interest Rate Environment," Federal Reserve Bank of Atlanta Working Paper No. 2011-10, May 2011.

Christiano, Lawrence J. "Comment on Eggertsson, 'What Fiscal Policy is Effective at Zero Interest Rates?'" Federal Reserve Bank of Atlanta CQER Working Paper No. 10-06, November 2010.

Christiano, Lawrence J., Martin Eichenbaum, and Sergio Rebelo, "When Is the Government Spending Multiplier Large?" Journal of Political Economy, February 2011, vol. 119, no. 1, pp. 78-121. (A working paper version is available online.)

Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and John C. Williams, "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?" Federal Reserve Bank of San Francisco Working Paper No. 2011-01, January 2011.

Eggertsson, Gauti B., "What Fiscal Policy Is Effective at Zero Interest Rates?" in NBER Macroeconomics Annual 2010, University of Chicago Press, 2011. (A working paper version is available online.)

Goodfriend, Marvin, "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit, and Banking, November 2000, Part 2, vol. 32, no. 4, pp. 1007-1035. (A working paper version is available online.)

Haltom, Renee Courtois, and Juan Carlos Hatchondo, "How Might the Fed's Large-Scale Asset Purchases Lower Long-Term Interest Rates?" Federal Reserve Bank of Richmond Economic Brief 11-01, January 2011.