SAFE Working Paper No. 50
51 Pages Posted: 16 May 2014
Date Written: April 2014
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: Suggested Citation