DP8193 Unconventional Fiscal Policy at the Zero Bound

Author(s): Isabel Correia, Emmanuel Farhi, Juan Pablo Nicolini, Pedro Teles
Publication Date: January 2011
Keyword(s): Fiscal policy, Monetary Policy, Sticky Prices, Zero Bound;
JEL(s): E31, E40, E52, E58, E62, E63
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8193

When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to inflate. We conclude that in the New Keynesian model, the zero bound on nominal interest rates is not a relevant constraint on both fiscal and monetary policy.