Some Unpleasant Properties of Loglinearized Solutions When the Nominal Rate is Zero
30 Pages Posted: 7 Oct 2015 Last revised: 9 Oct 2015
Date Written: September 25, 2015
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model’s implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labour tax rate is cut and the government purchase multiplier is less than 1.05.
Keywords: Zero lower bound, fiscal policy, New Keynesian model
JEL Classification: E52, E62
Suggested Citation: Suggested Citation