Working Paper: CEPR ID: DP8642
Authors: Jess Fernández-Villaverde; Pablo A. Guerrón-Quintana; Juan Francisco Rubio-Ramírez
Abstract: This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.
Keywords: New Keynesian Models; Supply-Side Policies; Zero Lower Bound
JEL Codes: E30; E50; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| future productivity (O49) | current consumption (E20) |
| future productivity (O49) | current output (C67) |
| reduction in markups (D40) | current consumption (E20) |
| reduction in markups (D40) | current output (C67) |
| supply-side policies (E65) | future productivity (O49) |
| wealth effect (E21) | current consumption (E20) |
| wealth effect (E21) | current output (C67) |