Exit Strategies

SAFE Working Paper No. 50

51 Pages Posted: 16 May 2014

See all articles by Ignazio Angeloni

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Ester Faia

Goethe University Frankfurt; Kiel Institute for the World Economy; University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences,

Date Written: April 2014

Abstract

We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate –– based on output and inflation performance and bank stability –– alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist, but are more nuanced.

Keywords: exit strategies, debt consolidation, …fiscal policy, …fiscal multipliers, monetary policy, bank runs

JEL Classification: G01, E63, H12

Suggested Citation

Angeloni, Ignazio and Faia, Ester and Winkler, Roland, Exit Strategies (April 2014). SAFE Working Paper No. 50. Available at SSRN: https://ssrn.com/abstract=2437326 or http://dx.doi.org/10.2139/ssrn.2437326

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Kiel Institute for the World Economy

P.O. Box 4309
Kiel, D-24100
Germany

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

Roland Winkler

Dortmund University, Faculty of Business, Economics, and Social Sciences, ( email )

United States

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