Temporary constraints and fiscal multipliers in normal and crisis regimes

Governments responded to the Great Recession of 2008 and 2009 by standing in for part of the losses incurred by banks, by acquiring or guaranteeing part of the accumulated private sector debt and by attempting to stimulate economic activity with increased public spending. Evaluating the impact of such rescue packages and stimulus programs requires improvements in policy-focused models. For example, models need to better capture the effect of changes in government spending and taxation on private sector demand in the context of financial fragility and rising public sector indebtedness. Projects in this work package need to account for nonlinearities and occasional binding constraints such as the zero bound on nominal interest rates, endogenous capital requirements and threshold effects related to the level of public debt.

Key Objectives

(O.6.1) Contribute new models that include a detailed fiscal sector and at the same time better account for the impact of rescue funds, consolidation measures and fiscal policy in the presence of financial risk and high levels of public debt.

(O.6.2) Analyse the size of fiscal multipliers associated with changes in government purchases, transfers andvarious tax rates in normal and crisis times that arise due to temporarily binding constraints (i.e. zero interest rate floor, capital and liquidity requirements). More realistic models for savings decisions of households in the context of limited life-time and overlapping generations are to be considered.

Main participants