Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment

Günter Coenen, Carlos Montes-Galdón and Frank Smets

No 2352, Working Paper Series from European Central Bank

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 for macroeconomic stability. Based on the ECB’s New Area-Wide Model of the euro area, our findings suggest that, if left 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 these distortions. 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. JEL Classification: E31, E32, E37, E52, E62

Keywords: asset purchases; effective lower bound; euro area; fiscal policy; forward guidance; monetary policy (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Note: 241047
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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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 (2021)
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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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202352

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