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Fiscal multipliers are not necessarily that large: a comment on Eggertsson (2010)

Lorant, Kaszab (2011): Fiscal multipliers are not necessarily that large: a comment on Eggertsson (2010).

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Abstract

This paper comments on Eggertsson (2010a) who argued that some fiscal policy measures like an increase in government spending or sales tax cut can be very effective in the recent peculiar environment of zero Federal Funds rate in the US. In particular, we show that the size of multipliers depends on the type of factor market structure (economy-wide or specific) we assume. Regarding the robustness of the results of Eggertsson (2010a) we argue that multipliers under zero nominal interest rate are a magnitude higher than those with positive interest only if the fiscal stimulus is sufficiently long (around ten years under specific labor market). Our work confirms and extends the results of Christiano (2010) who questioned the quantitative nature of the wage tax hike multiplier of Eggertsson (2010a).

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