Cooperative fiscal policy at the zero lower bound
David Cook (davcook@ust.hk) and
Michael Devereux
Journal of the Japanese and International Economies, 2011, vol. 25, issue 4, 465-486
Abstract:
This paper investigates the use of fiscal policy in response to a large negative aggregate demand shock which may push the global economy into a liquidity trap. Fiscal policy may be an effective tool to respond to a liquidity trap, but its international spillover effects may operate quite differently from its domestic effects. We derive the optimal cooperative fiscal response to a global liquidity trap in a two country world economy. Surprisingly, we find that the optimal fiscal spending response for a partner country to a negative aggregate demand shock in a source country may be negative. If fiscal policy can be chosen under policy commitment, the optimal response involves current fiscal expansion combined with future fiscal contraction, after the liquidity trap has ended.
Keywords: Liquidity Trap; Monetary Policy; Fiscal Policy; International spillovers (search for similar items in EconPapers)
JEL-codes: E2 E5 E6 (search for similar items in EconPapers)
Date: 2011
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Chapter: Cooperative Fiscal Policy at the Zero Lower Bound (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:25:y:2011:i:4:p:465-486
DOI: 10.1016/j.jjie.2011.09.002
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