Empirical Analysis on the Effects of Japanese Fiscal Policy under the Effective Lower Bound

Abstract:

For the Japanese Economy, we examine whether the fiscal multiplier is higher under the effective lower bound of the nominal interest rate. Using a time-varying parameter vector autoregression model with Tobit-type nonlinearity, we calculate the fiscal multipliers under two monetary policy positions. We find that when government spending shocks are inflationary, the fiscal multiplier under the zero interest rate policy increases steadily as a result of the decrease in the real interest rate. This evidence is robust to different definitions of effective lower bound, output, and government spending.