The fiscal multiplier and spillover in a global liquidity trap

Ippei Fujiwara, Kozo Ueda

    Research output: Contribution to journalArticle

    9 Citations (Scopus)

    Abstract

    We consider the fiscal multiplier and spillover-the extent to which one country's government expenditure increases production at home and also in another foreign country, when the two countries are caught simultaneously in a liquidity trap. Using a standard new open economy macroeconomics (NOEM) model, we show that the fiscal multiplier and spillover are contrary to textbook economics. For the country where government expenditure takes place, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one, and positive if it is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is critical in understanding the effects of fiscal policy in open economies. These results remain unchanged even if we incorporate incomplete markets or endogenous capital into the model, but local currency pricing yields positive fiscal spillover irrespective of the size of the intertemporal elasticity of substitution.

    Original languageEnglish
    Pages (from-to)1264-1283
    Number of pages20
    JournalJournal of Economic Dynamics and Control
    Volume37
    Issue number7
    DOIs
    Publication statusPublished - 2013 Jul

    Fingerprint

    Liquidity
    Trap
    Multiplier
    Elasticity
    Substitution reactions
    Currency
    Substitution
    Textbooks
    Fiscal Policy
    Costs
    Incomplete Markets
    Stabilization
    Macroeconomics
    Economics
    Pricing
    Exceed
    Lower bound
    Zero
    Term
    Model

    Keywords

    • Beggar-thy-neighbor
    • Fiscal policy
    • Two-country model
    • Zero lower bound

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Control and Optimization
    • Applied Mathematics

    Cite this

    The fiscal multiplier and spillover in a global liquidity trap. / Fujiwara, Ippei; Ueda, Kozo.

    In: Journal of Economic Dynamics and Control, Vol. 37, No. 7, 07.2013, p. 1264-1283.

    Research output: Contribution to journalArticle

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