Hafedh Bouakez, Michel Guillard, Jordan Roulleau-Pasdeloup
Abstract:We study optimal monetary and fiscal policy under commitment in an economy where monetary policy is constrained by the zero lower bound on the nominal interest rate, and where the government can allocate spending to public consumption and public investment. We show that the optimal response to an adverse shock that precipitates the economy into a liquidity trap entails a small and short-lived increase in public consumption but a large and persistent increase in public investment, which lasts well after the nat…
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