Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5057596 | Economics Letters | 2017 | 5 Pages |
â¢We study the fiscal multiplier in the Calvo and Rotemberg variants of the NK model.â¢The multiplier is significantly more variable across states in the Rotemberg model.â¢Multipliers are more variable when the nominal interest rate is pegged.â¢The difference between models is magnified when the nominal interest rate is pegged.â¢An interaction between inflation and the cost of inflation drives the difference.
This paper studies the properties of the fiscal multiplier in both the Calvo (1983) and Rotemberg (1982) variants of the New Keynesian model. Though identical to first order, the two variants of the model are not the same globally or to higher order. We solve both versions of the model using a third order approximation, and compute the distributions of fiscal multipliers by drawing from the ergodic distributions of states. The multiplier is significantly more variable across states in the Rotemberg model. These differences are magnified when the nominal interest rate is pegged instead of governed by an active Taylor rule.