Is There a Fiscal Free Lunch in a Liquidity Trap?

Erceg, Christopher J.; Lindé, Jesper

doi:10.1111/jeea.12059

Cited by 161 publications

(53 citation statements)

References 55 publications

(112 reference statements)

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“…switches in signs for the policy shocks). This …nding is consistent with Erceg and Lindé [65], who argue that a low slope of the Phillips curve is consistent with the development during the recent crisis where in ‡ation and in ‡ation expectations have fallen very moderately despite large contractions in output. It is also consistent with many recent papers which have estimated similar DSGE models, see e.g.…”

Section: (2009q1-2009q3supporting

confidence: 89%

Challenges for Central Banks’ Macro Models

Lindé

Smets

Wouters

2016

Handbook of Macroeconomics

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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. The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. Terms of use: Documents inThe papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments.The opinions expressed in this article are the sole responsibility of the author(s) and should not be interpreted as reflecting the views of Sveriges Riksbank. Challenges for Central Banks'Macro Models AbstractIn this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has di¢ culty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and …nally, we extend the model with a …nancial accelerator and allow for time-variation in the endogenous propagation of …nancial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not su¢ ce to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies. JEL Classi…cation: E52, E58

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Section: (2009q1-2009q3supporting

confidence: 89%

Challenges for Central Banks’ Macro Models

Lindé

Smets

Wouters

2016

Handbook of Macroeconomics

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“…While our benchmark calibration is in line with some of the empirical evidence, higher values for ψ = 40 cannot be ruled out (see e.g. the discussion in Erceg & Lindé (2010) and the references therein). Since ψ indexes price rigidity, a higher value for this parameter will imply a lower ∂π t ∂mc t .…”

Section: Model Solution and Baseline Calibrationsupporting

confidence: 75%

The composition of government spending and the multiplier at the zero lower bound

2014

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“…Keynes (1936), Krugman (1998), Eggertsson and Woodford (2003), Christiano, Eichenbaum and Rebelo (2011), Guerrieri and Lorenzoni (2011), Eggertsson and Krugman (2012), Werning (2012), and Correia, Farhi, Nicolini and Teles (2013 Farhi and Werning (2012), Cook andDevereux (2013a), (2013b) and (2014), Devereux and Yetman (2014), Benigno and Romei (2014) and Erceg and Lindé (2014)). While many of these papers share similar themes, our paper elucidates the link between the size and distribution across countries of the global recession and net foreign asset positions, with our Metzler diagram in quantities, allows for permanent liquidity traps and capital flows (global imbalances) via an OLG model, and introduces a distinction between risky and safe assets.…”

mentioning

confidence: 99%

Global Imbalances and Policy Wars at the Zero Lower Bound

Caballero

Farhi

Gourinchas

2015

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This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap|a phenomenon we dub the "reserve currency paradox"; (iii) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (iv) Beggar-thyneighbor exchange rate devaluations provide stimulus to the undertaking country at the expense of other countries (zero-sum); and (v) Safe public debt issuances, helicopter drops of money, and increases in government spending in any country are expansionary for all countries (positivesum). We use these results to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.

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Is There a Fiscal Free Lunch in a Liquidity Trap?

Cited by 161 publications

References 55 publications

Challenges for Central Banks’ Macro Models

Challenges for Central Banks’ Macro Models

The composition of government spending and the multiplier at the zero lower bound

Global Imbalances and Policy Wars at the Zero Lower Bound

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