Working Paper: NBER ID: w17543
Authors: Jess Fernández-Villaverde; Pablo A. Guerrón-Quintana; Juan 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: Supply-side policies; Zero lower bound; Aggregate demand; Productivity; Wealth effect
JEL Codes: E3; E4; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Future productivity (P_future) (O49) | Wealth Effect (W) (E21) |
| Wealth Effect (W) (E21) | Current Consumption (C_current) (E21) |
| Wealth Effect (W) (E21) | Output (O_current) (C67) |
| Higher future consumption (C_future) (D15) | Increased current consumption (C_current) (E20) |
| Supply-side policies (E65) | Wealth Effect (W) (E21) |
| Supply-side policies (E65) | Current Consumption (C_current) (E21) |
| Supply-side policies (E65) | Output (O_current) (C67) |