The composition of government spending and the multiplier at the zero lower bound

- We use a New Keynesian model to investigate the government spending multiplier in a liquidity trap.
- The multiplier at the ZLB depends crucially on the composition of the fiscal package.
- Substitutable and productive government spending reduce the multiplier.
- Under the ARRA specification the multiplier is lower than 1.

We investigate the size of the multiplier at the ZLB in a New Keynesian model. It ranges from around −0.25 to +1.5, depending on the extent to which the government spending is productive, substitutable or not for private consumption.