Optimal monetary and fiscal policy with a zero bound on nominal interest rates
I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short-term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.
| Author: | Sebastian Schmidt |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-253365 |
| Series (Serial Number) | Working Paper Series : Institute for Monetary and Financial Stability (53) |
| Document Type: | Working Paper |
| Language: | English |
| Date of Publication (online): | 06.07.2012 |
| Year of first Publication: | 2012 |
| Publishing Institution: | Univ.-Bibliothek Frankfurt am Main |
| Tag: | Commitment; Discretion; Fiscal policy; Monetary policy; New Keynesian model; Zero nominal interest rate bound |
| Institutes: | Institute for Monetary and Financial Stability |
| Dewey Decimal Classification: | 330 Wirtschaft |
| JEL-Classification: | E31 Price Level; Inflation; Deflation |
| E52 Monetary Policy | |
| E62 Fiscal Policy | |
| E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization | |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Veröffentlichungsvertrag für Publikationen ohne Print on Demand |
