Overcoming the zero interest-rate bound: A quantitative prescription (Revision of Working Paper No. 2006-14)

Kenneth Lewis and Laurence Seidman

No 08-04, Working Papers from University of Delaware, Department of Economics

Abstract: Using a macroeconometric model we provide a quantitative estimate of the cash transfer or tax cut that would achieve recovery from a severe recession when the central bank is unable to achieve full recovery because of the zero bound. We introduce an automatic transfer and simulate its triggering in the severe recession. We find that an automatic transfer that averages 3% of quarterly GDP repeated four times (quarterly) reduces the unemployment rate an additional full percentage point and thereby completes the recovery. We recommend that legislatures enact an automatic counter-cyclical fiscal policy that will assure adequate stimulus without generating a long-term debt problem.

Keywords: Zero-interest rate bound; Counter-cyclical fiscal policy (search for similar items in EconPapers)
JEL-codes: E58 E62 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008
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Citations: View citations in EconPapers (2)

Published in Journal of Policy Modeling

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