Working Paper: CEPR ID: DP8193
Authors: Isabel Correia; Emmanuel Farhi; Juan Pablo Nicolini; Pedro Teles
Abstract: 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.
Keywords: Fiscal Policy; Monetary Policy; Sticky Prices; Zero Bound
JEL Codes: E31; E40; E52; E58; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy (H29) | Economic stimulus (E65) |
| Zero lower bound on nominal interest rates (E43) | Tax policy (H29) |
| Tax adjustments (H29) | Economic stabilization (E63) |
| Tax policy (H29) | Avoiding downturns (E32) |
| Tax policy can substitute for monetary policy (E62) | Economic performance (P17) |