Working Paper: NBER ID: w16758
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; Zero Lower Bound; New Keynesian Model
JEL Codes: E12; E52; E58; E6; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zero lower bound on nominal interest rates binds (E43) | monetary policy cannot effectively stimulate the economy (E52) |
| zero lower bound on nominal interest rates binds (E43) | tax policy can act as a substitute to achieve similar outcomes (H29) |
| tax policy can deliver stimulus without incurring costs (H29) | economic outcomes improve (F61) |
| tax adjustments (H20) | economic outcomes (F61) |
| increase in taxes (H29) | decrease in real interest rates (E43) |
| decrease in real interest rates (E43) | stimulate consumption and investment (E20) |
| without flexibility of tax policy (H29) | economy would face significant downturns (F44) |