Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration

Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthias

doi:10.26509/frbc-wp-201215

Working Paper

Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration

Abstract: 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.

Keywords: Business; cycles;

https://doi.org/10.26509/frbc-wp-201215