Arbeitspapier

Seemingly irresponsible but welfare improving fiscal policy at the lower bound

In this paper, we evaluate the consequences of super-active fiscal policy rules - that is, rules that call for tax cuts and/or spending increases as the government's debt level rises - in a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate. We show that such seemingly irresponsible, debt-financed fiscal stimulus at the ZLB, unbacked by any promise of future tax increases or spending cuts, not only improves economic stability by acting as an automatic stabilizer, but also, somewhat paradoxically, reduces government debt accumulation. When evaluated using a model-consistent measure of welfare, fiscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to inflation, outperform a monetary policy that responds strongly to inflation and reduce the frequency of episodes at the ZLB.

Language
Englisch

Bibliographic citation
Series: Sveriges Riksbank Working Paper Series ; No. 410

Classification
Wirtschaft
Price Level; Inflation; Deflation
Monetary Policy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Subject
automatic stabilizers
fiscal and monetary interactions
government debt

Event
Geistige Schöpfung
(who)
Billi, Roberto M.
Walsh, Carl E.
Event
Veröffentlichung
(who)
Sveriges Riksbank
(where)
Stockholm
(when)
2022

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Billi, Roberto M.
  • Walsh, Carl E.
  • Sveriges Riksbank

Time of origin

  • 2022

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