Working Paper
Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration
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. Our explanation rests on a Jensen's inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models.
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. 12-35. https://doi.org/10.26509/frbc-wp-201235
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