Why are fiscal multipliers moderate even under monetary accommodation

Estimated fiscal multipliers for the US are typically moderate, despite evidence for the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on imperfect substitutability of assets. We document empirically that interest rates important for private borrowing/saving do not follow the response of the monetary policy rate, which is reflected by rising liquidity premia after spending hikes. A model with a structural specification of asset liquidity can replicate these findings and predicts moderate output effects fiscal expansions even when monetary policy rates fall or are fixed at the zero lower bound.