Fiscal stimulus in a global zero lower bound environment

7 August 2018
Publication Type: Working Paper
JEL Code: E4, E52, E62, F41, H54
This paper investigates the effect of fi scal stimulus from an emerging market economy perspective. The model captures the significant decline in China’s net exports and remarkable quantity of resources that the Chinese government invested into the economy through state-owned enterprises in the aftermath of the 2007-2008 global financial crisis. Our results suggest that scal stimulus has played an important role in dampening the economic downturn resulting from the significant decline in exports demand.The state-owned entrepreneur production channel amplies the multiplier effects of fiscal stimulus and produces a present-value multiplier of 1.6. In a global ZLB environment, scal stimulus has a dis-inflationary effect and dampens the expected inflation. Fiscal stimulus improves welfare significantly as a result of much higher household consumption associated with the enhanced multiplier effect. Implementation delays enhance the multiplier effect and the price stabilization effect of fiscal stimulus. It also improves social welfare significantly.
Working paper 758
1 August 2018
Journal: Journal of Asian Economics
1 August 2021