EconPapers    
Economics at your fingertips  
 

Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints

Taisuke Nakata

No 181, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: During the Great Recession, the government provided large fiscal stimulus in an economic environment characterized by a high degree of uncertainty on the future course of the economy while the nominal interest rate was constrained at the zero lower bound. While many papers have analyzed the effects of fiscal policy at the zero lower bound, they all do so in a deterministic environment. 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 environment. In the presence of uncertainty, the government chooses to increase its spending when at the zero lower bound by a substantially larger amount than it would in the deterministic environment. The welfare effect of fiscal policy is nuanced in the stochastic environment if the government cannot commit. Although the access to government spending policy increases welfare in the face of a large deflationary shock, it can decrease 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-dge, nep-mac and nep-mon
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25) Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2012/paper_181.pdf (application/pdf)

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 (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:181

Access Statistics for this paper

More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2019-04-02
Handle: RePEc:red:sed012:181