Fiscal policy at the zero lower bound : An analysis of fiscal policy effectiveness in stimulating economic growth
Sjöberg, Rickard (2023)
Sjöberg, Rickard
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2023031832363
https://urn.fi/URN:NBN:fi-fe2023031832363
Kuvaus
Den här avhandlingen undersöker om beslutsfattare i euroområdet bör förlita sig mer på finanspolitik för att stimuleraekonomin i en miljö i zero lower bound(ZLB), eftersom finanspolitik är ett kraftfullt alternativ för att stimulera ekonomin. Studien analyserar skillnaden i den finanspolitiska multiplikatorn under ZLB- och icke-ZLB-perioder och vad som orsakar skillnaden. Den finanspolitiska multiplikatorn definieras som förändringar i de offentliga utgifterna och dess effekt på BNP, inflation, konsumtion, investeringar och konsumenternas förtroendeindex. Resultaten visar att finanspolitiken har en mer signifikant effekt under ZLB-perioder än icke-ZLB-perioder per makroekonomisk teori. Analysen görs med en panel VAR-modell.
----------
----------
Tiivistelmä
In 2020, the COVID-19 pandemic caused a global economic decline, and policymakers in the euro area were unsure how to stimulate the economy. Lowering the policy rate was not an option as it was already at its zero lower bound (ZLB), causing a liquidity trap. However, fiscal policy is a powerful alternative for stimulating the economy, particularly in a ZLB, as according to conventional Keynesian theory, fiscal policy should be more efficient at stimulating the economy. Should policymakers in the euro area thus rely more on fiscal policy to boost the economy in a ZLB environment?
This thesis aims to study the difference in the fiscal policy multiplier (fiscal multiplier) during ZLB and non-ZLB periods and what causes the difference. Fiscal policy is defined as changes in government expenditure. The study of government expenditure and the expenditure’s ability to stimulate the economy is conducted by analyzing its effects on GDP, inflation, consumption, investment, and the consumer confidence index (CCI). In the thesis panel, vector autoregression (PVAR) is used to estimate the fiscal multiplier for the original EA countries. The timeframe used in the thesis is 1999 to 2021. The analysis is conducted by simulating a shock in government expenditure and measuring the effect on the other variables in the model. The effect on GDP is measured to construct a traditional fiscal multiplier. The analysis of consumption, investment, and CCI is made to deepen the analysis of the phenomena. The subsequent objective of this thesis is to make several contributions to the existing literature, namely: developing a specific multiplier for the EA region, enhancing the accuracy of estimates through the utilization of PVAR and GMM instruments, permitting the assessment of shorter time intervals, exploring the causality of larger multipliers during ZLB periods, and evaluating the efficacy of fiscal policy in promoting the economy’s recovery from a liquidity trap or growth recession.
The results show that fiscal policy has a more significant effect during ZLB periods than non-ZLB periods in accordance with the theory. The fiscal multiplier is 1.52 for ZLB periods and 0.30 for non-ZLB periods. While consumers’ reaction is essential, the results indicate that investment reaction is of more vital importance since the reaction of investment to expenditure differs the most between periods of and without ZLB. However, Large multipliers are only present during recessionary periods, although the multiplier is more substantial in all scenarios in ZLB periods.
Policymakers should undertake fiscal expansions to stimulate demand in ZLB conditions during recessions. However, exercising prudence in non-recessionary periods is essential to prevent crowding out of private investments. The findings suggest that using government expenditure to extricate the economy from a liquidity trap or growth recession is not a dependable strategy, given its ineffectiveness in fostering overall demand.
This thesis aims to study the difference in the fiscal policy multiplier (fiscal multiplier) during ZLB and non-ZLB periods and what causes the difference. Fiscal policy is defined as changes in government expenditure. The study of government expenditure and the expenditure’s ability to stimulate the economy is conducted by analyzing its effects on GDP, inflation, consumption, investment, and the consumer confidence index (CCI). In the thesis panel, vector autoregression (PVAR) is used to estimate the fiscal multiplier for the original EA countries. The timeframe used in the thesis is 1999 to 2021. The analysis is conducted by simulating a shock in government expenditure and measuring the effect on the other variables in the model. The effect on GDP is measured to construct a traditional fiscal multiplier. The analysis of consumption, investment, and CCI is made to deepen the analysis of the phenomena. The subsequent objective of this thesis is to make several contributions to the existing literature, namely: developing a specific multiplier for the EA region, enhancing the accuracy of estimates through the utilization of PVAR and GMM instruments, permitting the assessment of shorter time intervals, exploring the causality of larger multipliers during ZLB periods, and evaluating the efficacy of fiscal policy in promoting the economy’s recovery from a liquidity trap or growth recession.
The results show that fiscal policy has a more significant effect during ZLB periods than non-ZLB periods in accordance with the theory. The fiscal multiplier is 1.52 for ZLB periods and 0.30 for non-ZLB periods. While consumers’ reaction is essential, the results indicate that investment reaction is of more vital importance since the reaction of investment to expenditure differs the most between periods of and without ZLB. However, Large multipliers are only present during recessionary periods, although the multiplier is more substantial in all scenarios in ZLB periods.
Policymakers should undertake fiscal expansions to stimulate demand in ZLB conditions during recessions. However, exercising prudence in non-recessionary periods is essential to prevent crowding out of private investments. The findings suggest that using government expenditure to extricate the economy from a liquidity trap or growth recession is not a dependable strategy, given its ineffectiveness in fostering overall demand.