Working Paper 698

Unconventional Fiscal Policy at the Zero Bound

Isabel Correia
Juan Pablo Nicolini | Senior Research Economist
Pedro Teles | Banco de Portugal, Catolica Lisbon SBE, and CEPR
Emmanuel Farhi

Published August 8, 2012

When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.

Published In: American Economic Review (Vol. 103, No. 4, June 2013)

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