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Working Paper

Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration

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This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.
Topics
Monetary policy
Econometrics modeling and forecasting
06.19.2012ISSN 2573-7953 WP 12-15DOI 10.26509/frbc-wp-201215
Keywords fiscal multiplier, fixed interest rates, new keynesian model, zero lower bound
JEL Classification Codes E32

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., Timothy S. Fuerst, and Matthius Paustian. 2012. “Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration.” Federal Reserve Bank of Cleveland, Working Paper No. 12-15. https://doi.org/10.26509/frbc-wp-201215