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 639, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies - forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus - in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB's New Area-Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.

Keywords: effective lower bound; monetary policy; forward guidance; asset purchases; fiscal policy; euro area (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 E52 E62 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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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:zbw:cfswop:639

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