Fiscal stimulus in a global zero lower bound environment

Working paper 758
Author(s): 
Fernando Garcia-Barragan and Guangling Liu
Publication date: 
August, 2018
Classification-JEL: 
This paper investigates the effect of fiscal stimulus from an emerging market economy perspective. The model captures the signicant 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 signicantly 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 signicantly.
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