7Does scal policy have large and qualitatively dierent eects 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 scal policy at the zero bound may not be all that dierent from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05. $$We thank Ricardo Reis, the editor, and the referees for their very helpful comments. This paper has also beneted from comments from seminar participants at Australian National University, the Bank of Japan,

7Does scal policy have large and qualitatively dierent eects 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 scal policy at the zero bound may not be all that dierent from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05. $$We thank Ricardo Reis, the editor, and the referees for their very helpful comments. This paper has also beneted from comments from seminar participants at Australian National University, the Bank of Japan,

We develop a quantitative costly price adjustment model with capital formation for the Japanese economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3% during the 1990s avoids the zero bound and enhances welfare. JEL Classification Number: E30, E50.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in www.econstor.euA previous version of this paper circulated under the title "Some unpleasant properties of loglinearized solutions when the nominal rate is zero." The authors thank participants from seminars at Australian National University, the Bank of Japan, the Bank of Portugal, the seventh Dynare Conference, the European Central Bank, the Federal Reserve Bank of Atlanta, University of Tokyo, the University of Groningen, the London School of Economics, Vanderbilt University, and the Verein for Sozial Politik for their helpful comments. They also thank Larry Christiano, Isabel Correira, Luca Fornaro, Pedro Teles, and Tao Abstract: 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 literature is that the answer is yes. New evidence provided here suggests that the answer is often no. For a broad range of empirically relevant parameterizations of the Rotemberg model of costly price adjustment, the government purchase multiplier is about one or less, and the response of hours to a tax cut is either negative or close to zero. JEL classification: E5, E6

This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds should be set in a historydependent way. The optimal degree of discretion varies over time with the severity of the timeinconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, it is a transient phenomenon and some discretion is granted eventually.