Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/183601 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
IMFS Working Paper Series No. 126
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment? While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB, multipliers in this model can be considerably larger than one.
Subjects: 
Government spending multiplier
Fiscal stress
Zero lower bound
Financial frictions
JEL: 
E32
E44
E62
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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