Fiscal Stimulus at the Zero Lower Bound: the role of expectations and policy coordination
Cyntia Azevedo
No 486, Working Papers Series from Central Bank of Brazil, Research Department
Abstract:
In this article, we discuss the role expectations regarding future policies play in determining the depth of a crisis when the economy hits the zero lower bound on nominal interest rates. We show that when analyzing the impact of a fiscal stimulus during a zero interest rate episode, there is more than just short-run output multipliers. We extend the analysis in Eggertsson (2011) by allowing for a transitional state in which the zero lower bound is no longer binding, but policies can be expected to credibly deviate from their steady-state values. The main result of the paper is that, to have larger positive effects on output, monetary and fiscal policies should last longer than the duration of the shock and be coordinated. This coordination is required not only during the crisis but also in the commitment to future policy actions. It is fundamental to the fiscal authority to be able to respond quickly to the shock, minimizing implementation delays and correctly signaling the duration of the stimulus. We also show that a thoughtful evaluation of a fiscal stimulus in terms of the implied welfare losses should account not only for the effects of policies on short-run output and inflation, but also for the present discounted value of output and inflation in future periods as well.
Date: 2018-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps486.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:486
Access Statistics for this paper
More papers in Working Papers Series from Central Bank of Brazil, Research Department
Bibliographic data for series maintained by Rodrigo Barbone Gonzalez ().