Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates

Sebastian Schmidt

Journal of Money, Credit and Banking, 2013, vol. 45, issue 7, 1335-1350

Abstract: I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short‐term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.

Date: 2013
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https://doi.org/10.1111/jmcb.12054

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Journal Article: Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates (2013)
Working Paper: Optimal monetary and fiscal policy with a zero bound on nominal interest rates (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:45:y:2013:i:7:p:1335-1350

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