Exit Strategies

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