Supply-Side Policies and the Zero Lower Bound

31 Pages Posted: 28 Oct 2011

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: October 26, 2011

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. The authors illustrate this mechanism with a simple two-period New Keynesian model. They discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

Keywords: Zero lower bound, supply-side policies, New Keynesian models

JEL Classification: E30, E50, E60

Suggested Citation

Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco and Guerron-Quintana, Pablo, Supply-Side Policies and the Zero Lower Bound (October 26, 2011). FRB of Philadelphia Working Paper No. 11-47. Available at SSRN: https://ssrn.com/abstract=1950229 or http://dx.doi.org/10.2139/ssrn.1950229

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

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HOME PAGE: http://www.econ.umn.edu/~rubio

Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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