Fiscal Multipliers and the Zero Lower Bound

This paper studies the implications of the zero lower bound (ZLB) on interest rates for the size of fiscal multipliers. The analysis is carried out in an extended version of the ECB's New Area-Wide Model, which contains various fiscal instruments. The results show that the size of fiscal multipliers depends heavily on the length of the period during which the interest rate is binding. Government consumption is the most efficient instrument of fiscal policy; the value of its multiplier is well above one and can even be double for a long time at the ZLB. The multiplier for consumption taxes is also influenced substantially by the interest rate constraint, but its value remains below one. The multipliers for social security contributions and labour income taxes are not influenced much. The behaviour of the government investment multiplier is quite tricky: an amplfying effect on output is present only when the economy stays at the zero lower bound for just a few years; when there is a longer time at the ZLB, this multiplier can even be negative.