DP11633 Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan
Using a rich data set on government spending forecasts in Japan, we provide new evidence on the effects
of unexpected changes in government spending when the nominal interest rate is near the zero lower
bound (ZLB). The on-impact output multiplier is 1.5 in the ZLB period, and 0.6 outside of it. We argue
that these results are not driven by the amount of slack in the economy. A simple New Keynesian model
can reproduce some features of our empirical findings if the ZLB period is caused by a deflationary trap
and government spending is not too persistent.