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The Output Effects of (Non-Separable) Government Consumption at the Zero Lower Bound
E32 - Business Fluctuations; Cycles
E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
We investigate the reaction of output to government spending shocks at the zero lower bound (ZLB) on the nominal interest rate when government and private consumption are non-separable in preferences. In particular, substitutability between private and government consumption significantly reduces the otherwise large output multipliers obtained at the ZLB. Additionally, the coupling of substitutability with a debt-stabilizing fiscal rule can generate negative output multipliers on impact.