Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian literature is that the answer is yes. New evidence provided here suggests that the answer is often no. For a broad range of empirically relevant parameterizations of the Rotemberg model of costly price adjustment, the government purchase multiplier is about one or less, and the response of hours to a tax cut is either negative or close to zero.
JEL classification: E5, E6
Key words: monetary policy; zero interest rate; fiscal multipliers
A previous version of this paper circulated under the title "Some unpleasant properties of loglinearized solutions when the nominal rate is zero." The authors thank participants from seminars at Australian National University, the Bank of Japan, the Bank of Portugal, the seventh Dynare Conference, the European Central Bank, the Federal Reserve Bank of Atlanta, University of Tokyo, the University of Groningen, the London School of Economics, Vanderbilt University, and the Verein for Sozial Politik for their helpful comments. They also thank Larry Christiano, Isabel Correira, Luca Fornaro, Pedro Teles, and Tao Zha and for their helpful comments. Lena KÃ¶rber gratefully acknowledges financial support from Cusanuswerk and the Economic and Social Research Council. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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