Arbeitspapier
Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy
How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
- Sprache
-
Englisch
- Erschienen in
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Series: ECB Working Paper ; No. 1622
- Klassifikation
-
Wirtschaft
Price Level; Inflation; Deflation
Monetary Policy
Fiscal Policy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Consumer Economics: Theory
- Thema
-
deficit spending
discretion
monetary and fiscal policy
new Keynesian model
zero nominal interest rate bound
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Burgert, Matthias
Schmidt, Sebastian
- Ereignis
-
Veröffentlichung
- (wer)
-
European Central Bank (ECB)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2013
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:45 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Burgert, Matthias
- Schmidt, Sebastian
- European Central Bank (ECB)
Entstanden
- 2013