When Is the Government Spending Multiplier Large?

TLDR

The authors argue that the government‑spending multiplier can exceed one when the zero lower bound on the nominal interest rate binds, and they investigate its size in a dynamic stochastic general‑equilibrium model. They analyze the multiplier using a dynamic stochastic general‑equilibrium model. The model shows that the multiplier exceeds one when the zero bound binds, increasing with the share of spending during that period, and aligns with macro‑aggregate behavior observed in the recent financial crisis.

Abstract

We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger the fraction of government spending that occurs while the nominal interest rate is zero, the larger the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.