Are government spending shocks inflationary at the zero lower bound? New evidence from daily data

Sangyup Choi; Junhyeok Shin; Seung Yong Yoo

doi:10.1016/j.jedc.2022.104423

Are government spending shocks inflationary at the zero lower bound? New evidence from daily data

Sangyup Choi, Junhyeok Shin, Seung Yong Yoo

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract

Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to a positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB—driven by rising inflation and a falling real interest rate—a model with credit constraints can explain this anomaly.

Original language	English
Article number	104423
Journal	Journal of Economic Dynamics and Control
Volume	139
DOIs	https://doi.org/10.1016/j.jedc.2022.104423
Publication status	Published - 2022 Jun

Bibliographical note

Funding Information:
Comments from the editor (Juan Rubio-Ramirez) and three anonymous referees substantially improved the paper. We are thankful to Wongi Kim (discussant), Salem Abo-Zaid, Jaebin Ahn, Gillian Brunet, Daeha Cho, Lawrence Christiano, Jeongmin Ha, Joonyoung Hur, Kuk Mo Jung, Kwang Hwan Kim, Ryan Kim, Eunseong Ma, Kwangyong Park, Dongling Su, Donghoon Yoo and seminar participants at the HenU/INFER Workshop on Applied Macroeconomics 5.5, 2021 KER International Conference, Conference on “The Effects and Limitations of Fiscal Policy in the New Normal,” 2022 Annual Meeting of Korea's Allied Economic Associations, Sogang University, and Seoul National University Institute of International Affairs for their helpful comments. We appreciate Alberto Cavallo for helping with daily data on the Online Price Index. This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021–22–0011). This paper was written when Junhyeok Shin was a graduate student at Yonsei University. Any errors are the authors’ responsibility.

Funding Information:
Comments from the editor (Juan Rubio-Ramirez) and three anonymous referees substantially improved the paper. We are thankful to Wongi Kim (discussant), Salem Abo-Zaid, Jaebin Ahn, Gillian Brunet, Daeha Cho, Lawrence Christiano, Jeongmin Ha, Joonyoung Hur, Kuk Mo Jung, Kwang Hwan Kim, Ryan Kim, Eunseong Ma, Kwangyong Park, Dongling Su, Donghoon Yoo and seminar participants at the HenU/INFER Workshop on Applied Macroeconomics 5.5, 2021 KER International Conference, Conference on “The Effects and Limitations of Fiscal Policy in the New Normal,” 2022 Annual Meeting of Korea's Allied Economic Associations, Sogang University, and Seoul National University Institute of International Affairs for their helpful comments. We appreciate Alberto Cavallo for helping with daily data on the Online Price Index. This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021–22–0011). This paper was written when Junhyeok Shin was a graduate student at Yonsei University. Any errors are the authors’ responsibility.

Publisher Copyright:
© 2022 Elsevier B.V.

All Science Journal Classification (ASJC) codes

Economics and Econometrics
Control and Optimization
Applied Mathematics

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10.1016/j.jedc.2022.104423

Cite this

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title = "Are government spending shocks inflationary at the zero lower bound? New evidence from daily data",

abstract = "Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to a positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB—driven by rising inflation and a falling real interest rate—a model with credit constraints can explain this anomaly.",

author = "Sangyup Choi and Junhyeok Shin and Yoo, {Seung Yong}",

note = "Funding Information: Comments from the editor (Juan Rubio-Ramirez) and three anonymous referees substantially improved the paper. We are thankful to Wongi Kim (discussant), Salem Abo-Zaid, Jaebin Ahn, Gillian Brunet, Daeha Cho, Lawrence Christiano, Jeongmin Ha, Joonyoung Hur, Kuk Mo Jung, Kwang Hwan Kim, Ryan Kim, Eunseong Ma, Kwangyong Park, Dongling Su, Donghoon Yoo and seminar participants at the HenU/INFER Workshop on Applied Macroeconomics 5.5, 2021 KER International Conference, Conference on “The Effects and Limitations of Fiscal Policy in the New Normal,” 2022 Annual Meeting of Korea's Allied Economic Associations, Sogang University, and Seoul National University Institute of International Affairs for their helpful comments. We appreciate Alberto Cavallo for helping with daily data on the Online Price Index. This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021–22–0011). This paper was written when Junhyeok Shin was a graduate student at Yonsei University. Any errors are the authors{\textquoteright} responsibility. Funding Information: Comments from the editor (Juan Rubio-Ramirez) and three anonymous referees substantially improved the paper. We are thankful to Wongi Kim (discussant), Salem Abo-Zaid, Jaebin Ahn, Gillian Brunet, Daeha Cho, Lawrence Christiano, Jeongmin Ha, Joonyoung Hur, Kuk Mo Jung, Kwang Hwan Kim, Ryan Kim, Eunseong Ma, Kwangyong Park, Dongling Su, Donghoon Yoo and seminar participants at the HenU/INFER Workshop on Applied Macroeconomics 5.5, 2021 KER International Conference, Conference on “The Effects and Limitations of Fiscal Policy in the New Normal,” 2022 Annual Meeting of Korea's Allied Economic Associations, Sogang University, and Seoul National University Institute of International Affairs for their helpful comments. We appreciate Alberto Cavallo for helping with daily data on the Online Price Index. This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021–22–0011). This paper was written when Junhyeok Shin was a graduate student at Yonsei University. Any errors are the authors{\textquoteright} responsibility. Publisher Copyright: {\textcopyright} 2022 Elsevier B.V.",

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doi = "10.1016/j.jedc.2022.104423",

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Are government spending shocks inflationary at the zero lower bound? New evidence from daily data

Abstract

Bibliographical note

All Science Journal Classification (ASJC) codes

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