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.