Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints

31 Pages Posted: 31 Jul 2013

See all articles by Taisuke Nakata

Taisuke Nakata

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2013

Abstract

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 New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound.

Keywords: Fiscal policy, government spending, occasionally binding constraints, liquidity trap, zero lower bound, Markov-perfect equilibria, commitment

JEL Classification: E32, E52, E61, E62, E63

Suggested Citation

Nakata, Taisuke, Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints (April 30, 2013). FEDS Working Paper No. 2013-40, Available at SSRN: https://ssrn.com/abstract=2303884 or http://dx.doi.org/10.2139/ssrn.2303884

Taisuke Nakata (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
96
Abstract Views
623
Rank
492,371
PlumX Metrics