Unconventional Fiscal Policy at the Zero Bound

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.

Number of Pages in PDF File: 31

Keywords: Fiscal policy, Monetary Policy, Sticky Prices, Zero Bound;

JEL Classification: E31, E40, E52, E58, E62, E63

working papers series