Seemingly Irresponsible but Welfare Improving Fiscal Policy at the Lower Bound

Roberto Billi and Carl Walsh

No 410, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: In this paper, we evaluate the consequences of super-active Öscal policy rulesó that is, rules that call for tax cuts and/or spending increases as the governmentís debt level risesó in a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate. We show that such seemingly irresponsible, debt-Önanced Öscal stimulus at the ZLB, unbacked by any promise of future tax increases or spending cuts, not only improves economic stability by acting as an automatic stabilizer, but also, somewhat paradoxically, reduces government debt accumulation. When evaluated using a model-consistent measure of welfare, Öscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to ináation, outperform a monetary policy that responds strongly to ináation and reduce the frequency of episodes at the ZLB.

Keywords: automatic stabilizers; Öscal and monetary interactions; government debt (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2022-02-01
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: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0410

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