Unconventional Fiscal Policy at the Zero Bound

Isabel Correia; Emmanuel Farhi; Juan Pablo Nicolini; Pedro Teles

doi:10.3386/w16758

Unconventional Fiscal Policy at the Zero Bound

Isabel Correia, Emmanuel Farhi, Juan Pablo Nicolini & Pedro Teles

Working Paper 16758

DOI 10.3386/w16758

Issue Date February 2011

When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to inflate. We conclude that in the New Keynesian model, the zero bound on nominal interest rates is not a relevant constraint on both fiscal and monetary policy.

This paper circulated with the title Policy at the Zero Bound. We thank Fernando Alvarez, Pierpaolo Benigno, Javier Garcia-Cicco, Patrick Kehoe, Narayana Kocherlakota, John Leahy, Kjetil Storesletten, Sam Schulhofer-Wohl, Harald Uhlig, Tao Zha, participants at the 8th Hydra Workshop, and at seminars at the University of Chicago, Princeton U., U.C. San Diego, Bank of Spain, the Federal Reserve Banks of Atlanta, Chicago, Minneapolis and St Louis, and the Board of Governors. Correia and Teles gratefully acknowledge Önancial support of FCT. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
MARC RIS BibTeΧ

Unconventional Fiscal Policy at the Zero Bound

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