EconPapers    
Economics at your fingertips  
 

Escaping the Great Recession

Leonardo Melosi and Francesco Bianchi

No 203, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model in which policy makers' reputation for Fiscal Virtue evolves over time. Fiscal Virtue is generally desirable because it leads to a stable macroeconomic environment, but when entering the zero lower bound, policy makers face a trade-off between preserving their reputation and escaping a large recession. Given that policy makers' behavior is constrained at the zero lower bound, beliefs about the exit strategy are substantially more important than policies implemented during the crisis. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning Fiscal Virtue, but this results into a sharp increase in macroeconomic instability. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. Finally, while high uncertainty is an inherent implication of entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policy makers will deal with the large stock of debt arising from a severe recession.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (4)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Escaping the Great Recession (2017) Downloads
Working Paper: Escaping the Great Recession (2016) Downloads
Working Paper: Escaping the Great recession (2015) Downloads
Working Paper: Escaping the Great Recession (2014) Downloads
Working Paper: Escaping the Great Recession (2014) Downloads
Working Paper: Escaping the Great Recession (2013) Downloads
Working Paper: Escaping the Great Recession (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:sed013:203

Access Statistics for this paper

More papers in 2013 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 2025-03-23
Handle: RePEc:red:sed013:203