DP10210 Is Government Spending at the Zero Lower Bound Desirable?
|Author(s):||Florin Ovidiu Bilbiie, Tommaso Monacelli, Roberto Perotti|
|Publication Date:||October 2014|
|Keyword(s):||government spending multiplier, welfare, zero lower bound|
|JEL(s):||D91, E21, E62|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10210|
Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. When government spending provides direct utility to the household, its optimal level is at most 0.5-1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare-detrimental: it should be kept unchanged at a long run-optimal value.