Government Spending Multipliers in a Liquidity Trap: Evidence From a Panel of Advanced Economies

Sammanfattning: When interest rates are close to their zero lower bound, much of New Keynesian theory suggests that government multipliers are elevated and provides clear mechanisms that generate these larger multipliers. However, empirical evidence on both the size of multipliers and the predicted channels is more mixed. Previous research has not focused much on the liquidity trap episode that followed the 2008 crash. Additionally, much of the research into output multipliers dependent on the binding lower bound has only considered the economies of the United States and Japan. This thesis sheds new light on the effects of government spending at the zero lower bound. To do this, it uses local projection methods to empirically investigate multipliers during the post-2008 liquidity trap for a panel of advanced economies (Euro Area, United Kingdom and United States). This research finds that multipliers are enlarged when rates are close to the lower bound. While there is some evidence that multipliers are larger in liquidity traps that have a longer expected duration, there is limited evidence of the expected inflation channel.