Achieving two policy targets with one policy instrument: heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound

Gilberto Lima, Mark Setterfield and Jaylson Jair Silveira ()
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Jaylson Jair Silveira: Federal University of Santa Catarina

Review of Evolutionary Political Economy, 2025, vol. 6, issue 1, 135-155

Abstract: Abstract We explore the short-term macrodynamics of stabilization policy at the effective lower bound (ELB) of the nominal interest rate, in an environment characterized by heterogenous and endogenously time-varying private-sector output and inflation expectations driven by evolutionary dynamics. We show that at the ELB, fiscal policy conducted in accordance with a well-specified policy rule is particularly effective for purposes of macroeconomic stabilization. This is because fiscal interventions have both a direct effect on output and inflation (via aggregate demand formation) and an indirect effect on these same target variables, via the management of heterogenous and evolving expectations. As a result of the two channels through which it operates, and seemingly despite the logic of the Tinbergen (targets-instruments) principle, fiscal policy is thus revealed as a single policy instrument capable of achieving two policy goals.

Keywords: Stabilization policy; Effective lower bound; Fiscal policy; Heterogeneous inflation and output expectations; Satisficing evolutionary dynamics; E12; E52; E62; E63; E71 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Achieving two policy targets with one policy instrument: heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound (2023)
Working Paper: Achieving two policy targets with one policy instrument: heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound (2023)
Working Paper: Achieving two policy targets with one policy instrument: heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound (2023)
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DOI: 10.1007/s43253-024-00143-z

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