The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?

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Standard New Keynesian models predict that expansionary …scal policy is in‡ationary. In contrast, this paper presents empirical evidence that prices do not increase in
response to a positive government spending shock. Instead, the response of prices is ‡at or even negative. This …nding is robust across a wide range of speci…cations of
our Structural Vector Autoregression (SVAR) model and across di¤erent price indices. The puzzling response of prices is accompanied by an increase in output and private
consumption, as found in most of the existing literature, as well as an increase in Total Factor Productivity. We show that the introduction of variable technology utilization
can enable an otherwise standard New Keynesian model to account for our empirical …ndings. The model implies that the government spending multiplier is substantially
lower when the economy is in a fundamental liquidity trap, as compared to normal times, in contrast to the predictions of standard New Keynesian models.
OriginalsprogEngelsk
Artikelnummer103982
TidsskriftEuropean Economic Review
Vol/bind141
Antal sider43
ISSN0014-2921
DOI
StatusUdgivet - 2021

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