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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 17.04

Jordan Roulleau-Pasdeloup


The Government Spending Multiplier in a (Mis-)Managed Liquidity Trap

March 14, 2017

Abstract

I study the impact of a government spending shock in a New Keynesian model when monetary policy is set optimally. In this framework, the economy is at the Zero Lower Bound but expectations are well managed by the Central Bank. As such, the multiplier effect of government spending increases on expected inflation is close to zero while the one on output can be larger than one. This is consistent with recent empirical evidence on the effects of the 2009 American Recovery and Reinvestment Act.

JEL Classification: E31, E32, E52, E62

Keywords: Zero lower bound, New Keynesian, Government spending multiplier

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