Unconventional Fiscal Policy at the Zero Bound

Isabel Correia, Emmanuel Farhi, Juan Pablo Nicolini, Pedro Teles

NBER Working Paper No. 16758
Issued in February 2011
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w16758

Published: Isabel Correia & Emmanuel Farhi & Juan Pablo Nicolini & Pedro Teles, 2013. "Unconventional Fiscal Policy at the Zero Bound," American Economic Review, American Economic Association, vol. 103(4), pages 1172-1211, June. citation courtesy of