EconPapers    
Economics at your fingertips  
 

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
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0889158311000517
Full text for ScienceDirect subscribers only

Related works:
Chapter: Cooperative Fiscal Policy at the Zero Lower Bound (2010)
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:eee:jjieco:v:25:y:2011:i:4:p:465-486

DOI: 10.1016/j.jjie.2011.09.002

Access Statistics for this article

Journal of the Japanese and International Economies is currently edited by Takeo Hoshi

More articles in Journal of the Japanese and International Economies from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).

 
Page updated 2024-12-28
Handle: RePEc:eee:jjieco:v:25:y:2011:i:4:p:465-486