Government debt,inflation dynamics and the transmission of fiscal policy shocks |
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| Institution: | 1. University of Wuerzburg, Department of Economics, Sanderring 2, 97070 Wuerzburg, Germany;2. University of Innsbruck, Department of Economics, Universitaetsstrasse 15, A-6020 Innsbruck, Austria;1. Shih Hsin University, Taipei, Taiwan;2. National Chengchi University, Taipei, Taiwan;3. Soochow University, Taipei, Taiwan;1. Gebze Technical University, Department of Economics, P.K.:141, 41400 Gebze, Kocaeli, Turkey;2. Sabanci University, Faculty of Arts and Social Sciences, Orhanli/Tuzla, 34956 Istanbul, Turkey |
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| Abstract: | We analyze the influence of the fiscal position on the transmission of government spending shocks in a New Keynesian model. We find that once we allow for positive levels of government debt in the steady state, the size of the fiscal multiplier depends strongly on the horizon at which the multiplier is evaluated. While the long-run effect of a fiscal policy innovation is typically of a similar order of magnitude as in Galí et al. (2007), short-run multipliers differ substantially. The reason for this non-monotonic behavior is the interaction between the dynamics of the inflation rate and the debt level in real terms for sufficiently high levels of government debt in the steady state. |
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