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Optimal fiscal and monetary policy with occasionally binding zero bound constraints

Taisuke Nakata

No 2013-40, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2013
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Related works:
Journal Article: Optimal fiscal and monetary policy with occasionally binding zero bound constraints (2016) Downloads
Working Paper: Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints (2012) Downloads
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