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When Is the Government Spending Multiplier Large?

Lawrence J. Christiano, Martin Eichenbaum, and Sergio Rebelo
CQER Working Paper 10-01
August 2010

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We argue that the government spending multiplier can be very large when the nominal interest rate is constant. We focus on a natural case in which the interest rate is constant, which is when the zero lower bound on nominal interest rates binds. For the economies that we consider it is optimal to increase government spending in response to shocks that make the zero bound binding.

JEL classification: E3, E4, E5, H3

Key words: multiplier, zero bound, deflation spiral


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.

Please address questions regarding content to Larry Christiano, Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, 847-491-8231, l-christiano@northwestern.edu; Martin Eichenbaum, Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, 847-491-8232, eich@northwestern.edu; or Sergio Rebelo, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, 847-467-2329, s-rebelo@kellogg.northwestern.edu.

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