Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment

Frank Smets, Günter Coenen and Montes-Galdón, Carlos
Authors registered in the RePEc Author Service: Carlos Montes-Galdón

No 16050, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the incidence and severity of periods with a binding effective lower bound on nominal interest rates and the efficacy of three types of state-dependent policies—forward guidance about the path of future interest rates, large-scale asset purchases and spending based fiscal stimulus—in mitigating the detrimental consequences of the lower bound. Based on the ECB’s New Area-Wide Model of the euro area, our findings suggest that, if unaddressed, the lower bound can cause substantial macroeconomic distortions. In the near term, forward guidance, if fully credible, is most powerful and can largely undo the distortions due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, especially when asset purchases enhance the credibility of the forward-guidance policy via a signalling effect. In the long run, with an equilibrium real rate as low as zero, a combination of all three policies is needed to materially reduce the distortions.

Keywords: Effective lower bound; Monetary policy; Forward guidance; Asset purchases; Fiscal policy; Euro area (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 E52 E62 (search for similar items in EconPapers)
Date: 2021-04
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Effects of State‐Dependent Forward Guidance, Large‐Scale Asset Purchases, and Fiscal Stimulus in a Low‐Interest‐Rate Environment (2023)
Working Paper: Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment (2020)
Working Paper: Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment (2020)
Working Paper: Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment (2019)
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