TY - JOUR
T1 - The fiscal multiplier and spillover in a global liquidity trap
AU - Fujiwara, Ippei
AU - Ueda, Kozo
PY - 2013/7
Y1 - 2013/7
N2 - 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.
AB - 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.
KW - Beggar-thy-neighbor
KW - Fiscal policy
KW - Two-country model
KW - Zero lower bound
UR - http://www.scopus.com/inward/record.url?scp=84876827676&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84876827676&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2013.02.006
DO - 10.1016/j.jedc.2013.02.006
M3 - Article
AN - SCOPUS:84876827676
VL - 37
SP - 1264
EP - 1283
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
IS - 7
ER -