Discussion paper

DP10210 Is Government Spending at the Zero Lower Bound Desirable?

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.

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Citation

Perotti, R, T Monacelli and F Bilbiie (2014), ‘DP10210 Is Government Spending at the Zero Lower Bound Desirable?‘, CEPR Discussion Paper No. 10210. CEPR Press, Paris & London. https://cepr.org/publications/dp10210