Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis

FEDS Working Paper No. 2015-038

http://dx.doi.org/10.17016/FEDS.2015.038

35 Pages Posted: 20 Jun 2015

See all articles by Taisuke Nakata

Taisuke Nakata

Board of Governors of the Federal Reserve System

Date Written: May 31, 2015

Abstract

This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax instrument and the initial debt level.

Keywords: Commitment, Distortionary Taxation, Government Spending, Liquidity Trap, Nominal Debt, Optimal Policy, Zero Lower Bound

JEL Classification: E32, E52, E61, E62, E63

Suggested Citation

Nakata, Taisuke, Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis (May 31, 2015). http://dx.doi.org/10.17016/FEDS.2015.038. Available at SSRN: https://ssrn.com/abstract=2620762 or http://dx.doi.org/10.2139/ssrn.2620762

Taisuke Nakata (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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