Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy

How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero 
How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
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Metadaten
Author:Matthias Burgert, Sebastian Schmidt
URN:urn:nbn:de:hebis:30:3-314810
URL:http://www.imfs-frankfurt.de/fileadmin/user_upload/pdf/WP_72.pdf
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 72
Series (Serial Number):Working Paper Series : Institute for Monetary and Financial Stability (72)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/09/05
Tag:Deficit spending; Discretion; Fiscal Policy; Monetary Policy; New Keynesian model; Zero nominal interest rate bound
Pagenumber:36
First Page:1
Last Page:32
HeBIS PPN:344382788
Institutes:Wirtschaftswissenschaften
Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D11 Consumer Economics: Theory
E31 Price Level; Inflation; Deflation
E52 Monetary Policy
E62 Fiscal Policy
E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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