We estimate the effects of government consumption and investment shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound. Using a panel VAR model for 17 advanced countries, in which we include real government spending, output, inflation, and the real interest rate, we find that both the cumulative government consumption and investment multipliers are significantly higher (and exceed unity) when interest rates are persistently low. These results are robust for using different threshold values for the nominal interest rate or the length of the period with low interest rates to proxy the ELB.
Keywords: fiscal multipliers, effective lower bound, panel VAR.
JEL classifications: E6, E62, E65. Working paper no. 565