Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189950
Authors: 
Lindé, Jesper
Trabandt, Mathias
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series 350
Abstract: 
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long-lived liquidity traps.
Subjects: 
Monetary Policy
Fiscal Policy
Liquidity Trap
Zero Lower Bound
JEL: 
E52
E58
Document Type: 
Working Paper
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