Are government spending shocks inflationary at the zero lower bound? New evidence from daily data

Vol: 
19/2022
Author name: 
Choi S
Shin J
Yoo SY
Year: 
2022
Month: 
February
Abstract: 

Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB - driven by rising inflation and a falling real interest rate - a model with credit constraints can explain this anomaly.

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