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Is Government Spending at the Zero Lower Bound Desirable?†

Is Government Spending at the Zero Lower Bound Desirable?† AbstractWe build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually observed in the data, we reach three main results. First, the increase in government consumption after 2008, albeit small in present value terms, was close to optimal. Second, frontloading the same stimulus would have been welfare-improving. Third, larger welfare effects occur in our model for parameter values implying either large welfare costs of modest recessions (e.g., high consumption curvature), or outright large recessions. (JEL E12, E32, E43, E62, H50) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Is Government Spending at the Zero Lower Bound Desirable?†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20150229
Publisher site
See Article on Publisher Site

Abstract

AbstractWe build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually observed in the data, we reach three main results. First, the increase in government consumption after 2008, albeit small in present value terms, was close to optimal. Second, frontloading the same stimulus would have been welfare-improving. Third, larger welfare effects occur in our model for parameter values implying either large welfare costs of modest recessions (e.g., high consumption curvature), or outright large recessions. (JEL E12, E32, E43, E62, H50)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2019

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