Monetary and Fiscal Policy Design at the Zero Lower Bound: Evidence from the Lab

21 Pages Posted: 27 Feb 2019

See all articles by Cars H. Hommes

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Domenico Massaro

Catholic University of Milan; University of Amsterdam - CeNDEF

Isabelle Salle

Government of Canada - Bank of Canada

Date Written: April 2019

Abstract

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation‐driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger‐than‐unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning.

JEL Classification: E70, C92, D83, D84, E52, E62

Suggested Citation

Hommes, Cars H. and Massaro, Domenico and Salle, Isabelle, Monetary and Fiscal Policy Design at the Zero Lower Bound: Evidence from the Lab (April 2019). Economic Inquiry, Vol. 57, Issue 2, pp. 1120-1140, 2019, Available at SSRN: https://ssrn.com/abstract=3342650 or http://dx.doi.org/10.1111/ecin.12741

Cars H. Hommes (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Domenico Massaro

Catholic University of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Isabelle Salle

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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