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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration
Charles T. Carlstrom
Timothy S. Fuerst
Matthias Paustian
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.


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Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, Fiscal multipliers under an interest rate peg of deterministic vs. stochastic duration, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1215, 2012.
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Keywords: Business; cycles
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