Some Unpleasant Properties of Loglinearized Solutions When the Nominal Rate Is Zero

R. Anton Braun, Lena Mareen Boneva, and Yuichiro Waki

Working Paper 2012-5a
Revised November 2015

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Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model's implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05.

JEL classification: E52; E62

Key words: zero lower bound; fiscal policy; New Keynesian model

This paper previously circulated under the title of "Small and Orthodox Fiscal Multipliers at the Zero Bound." The authors thank participants from seminars at Australian National University, the Bank of Japan, the Bank of Portugal, the 7th Dynare Conference, the European Central Bank, the Federal Reserve Bank of Atlanta, the University of Tokyo, the University of Groningen, London School of Economics, Vanderbilt University, and the Verein for Sozial Politik for their helpful comments. They also thank Larry Christiano, Isabel Correira, Luca Fornaro, Pedro Teles, and Tao Zha for their helpful comments. Lena Boneva gratefully acknowledges financial support from Cusanuswerk and the Economic and Social Research Council. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System or the Bank of England. Any remaining errors are the authors' responsibility.
Please address questions regarding content to R. Anton Braun (corresponding author), Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309, 404-498-8708,; Lena Mareen Boneva, Bank of England, Threadneedle Street, London EC2R 8AH, UK,; or Yuichiro Waki, School of Economics, University of Queensland, St Lucia QLD 4072, Australia,
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