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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
The fiscal multiplier and spillover in a global liquidity trap
Ippei Fujiwara
Kozo Ueda
Abstract

We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.


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Ippei Fujiwara & Kozo Ueda, The fiscal multiplier and spillover in a global liquidity trap, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 51, 2010.
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Note: Published as: Fujiwara, Ippei and Kozo Ueda (2013), "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," Journal of Economic Dynamics and Control 37 (7): 1264-1283.
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