The fiscal multiplier and spillover in a global liquidity trap

Ippei Fujiwara, Kozo Ueda

Research output: Contribution to journalArticle

10 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 1
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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