Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription

Kenneth Lewis and Laurence Seidman

No 06-14, Working Papers from University of Delaware, Department of Economics

Abstract: Two recent empirical studies of the 2001 recession published in the American Economic Review imply that an old-fashioned Keynesian fiscal stimulus—a cash transfer (“tax rebate”) or tax cut to households-- can overcome the zero interest-rate bound problem. We provide a quantitative estimate of the cash transfer that would achieve recovery from a severe recession when confronted with the zero bound. We obtain our result by adapting and simulating a macro-econometric model that has been recently econometrically estimated. With the interest rate near zero, a cash transfer equal to 3% of quarterly GDP repeated four times (quarterly) would reduce the unemployment rate nearly a full percentage point.

Keywords: Recession; Fiscal Policy; Tax Rebate (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
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Journal Article: Overcoming the zero interest-rate bound: A quantitative prescription (2008)
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