The Fiscal Multiplier and Spillover in a Global Liquidity Trap

Download or read book The Fiscal Multiplier and Spillover in a Global Liquidity Trap written by Ippei Fujiwara and published by . This book was released on 2010 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, 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 the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.--Author's abstract.