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 Silveira ()

No 86-2023, FMM Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

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 (search for similar items in EconPapers)
JEL-codes: E12 E52 E62 E63 E71 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2023
New Economics Papers: this item is included in nep-mac and nep-pke
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Related works:
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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Persistent link: https://EconPapers.repec.org/RePEc:imk:fmmpap:86-2023

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