Quasi-monetary and quasi-fiscal policy rules at the zero-lower bound

This paper assesses adjustments at the zero lower bound (ZLB) in an economy incorporating financial frictions and nominal price stickiness. We examine the dynamic paths of key variables under recurring real (productivity) and financial (net worth) shocks under three alternative policy scenarios: rem...

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Bibliographic Details
Published in:Journal of international money and finance 2016-12, Vol.69, p.135-150
Main Authors: Lim, G.C., McNelis, Paul D.
Format: Article
Language:English
Subjects:
Consumption
Fiscal policy
Interest rates
Macroeconomics
Monetary policy
Quantitative easing
Studies
Tax rates
Tax rules
Zero lower bound
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Summary:This paper assesses adjustments at the zero lower bound (ZLB) in an economy incorporating financial frictions and nominal price stickiness. We examine the dynamic paths of key variables under recurring real (productivity) and financial (net worth) shocks under three alternative policy scenarios: removal of the zero lower bound (to allow for negative rates), quantitative easing policies at the ZLB, and the use of endogenous tax-rates rules for consumption and labor income at the ZLB. The results show that the fiscal tax-rate rules (acting like a quasi-monetary policy with direct effects on consumption) can be as effective as quantitative easing (a quasi-fiscal policy with indirect effects on investment) in times of prolonged crises due to recurring negative shocks.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2016.06.007