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Boneva, Lena Mareen; Braun, R. Anton; Waki, Yuichiro
Journal of monetary economics, 12/2016, Volume: 84Journal Article
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model׳s implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05. •We show that it matters how one solves the New Keynesian model at the zero lower bound (ZLB).•The nonlinear solution exhibits new types of ZLB equilibria that cannot occur using a loglinearized solution.•Fiscal multipliers are small and orthodox at the ZLB for a large and plausible set of parameterizations of the model.•The New Keynesian model can be used to make a case for supply-side fiscal stimulus at the ZLB.•In situations where a labor tax rate cut increases employment, the government purchase multiplier is about one or less.
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