Fiscal Multipliers: Liquidity Traps and Currency Unions
Name
Werning12-23.pdf
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391.46 KB
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Adobe PDF
Checksum (MD5)
2002b5ec92cef8ffe9f8656299cc6254
Author(s)
Farhi, Emmanuel
Werning, Iván
Date Issued
August 31, 2012
Publisher
Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
Series/Report no.
Working paper, Massachusetts Institute of Technology, Dept. of Economics;12-23
Abstract
We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity. However, outside transfers or windfalls can generate larger responses in output, whether or not they are spent by the government. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.
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