Unconventional Fiscal Policy at the Zero Bound

Correia, Maria Isabel Horta; Farhi, Emmanuel; Nicolini, Juan Pablo; Teles, Pedro

doi:10.3386/w16758

Cited by 133 publications

(202 citation statements)

References 15 publications

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“…Figure 6 likewise shows that relative output and inflation also falls by more in the multiple currency case than in the single currency area. Finally, even under the optimal policy rule, the terms of trade still appreciates under the multiple currency case, while as before, the terms of trade in the single currency area depreciates 11 .…”

Section: Extension To Optimal Monetary Policymentioning

confidence: 99%

Exchange rate flexibility under the zero lower bound

Cook

Devereux

2016

Journal of International Economics

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An independent currency and a flexible exchange rate generally helps a country in adjusting to macroeconomic shocks. But recently in many countries, interest rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in countries with flexible exchange rates. This paper argues that if the zero bound constraint is binding and policy lacks an effective 'forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area. With monetary policy constrained by the zero bound, under flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates under an optimal targeting rule. In a zero lower bound environment, in order for a regime of multiple currencies to dominate a single currency, it is necessary to have effective forward guidance in monetary policy.

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Section: Extension To Optimal Monetary Policymentioning

confidence: 99%

Exchange rate flexibility under the zero lower bound

Cook

Devereux

2016

Journal of International Economics

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“…Correia, Farhi, Nicolini, and Teles (2013) analyzed the model in which the government can simultaneously choose all of labor-income tax, consumption tax, and lump-sum tax, and they showed that there is no role for government spending in that environment. Eggertsson and Woodford (2004) studied the optimal mix of a distortionary taxation and debt, assuming that the government spending is not available, and Eggertsson (2011) studied the effects of exogenous changes in distortionary taxes on allocations at the ZLB.…”

Section: Introductionmentioning

confidence: 99%

Optimal government spending at the zero lower bound: A non-Ricardian analysis

Nakata

2017

Review of Economic Dynamics

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This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state.The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax instrument and the initial debt level.JEL: E32, E52, E61, E62, E63

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“…8 Neither of these studies however explores exact equivalence with a nominal devaluation, as we do in this paper. Lastly, this paper is similar in spirit to Correia, Farhi, Nicolini, and Teles (2011) who, building on the general implementation results of Correia, Nicolini, and Teles (2008), use fiscal instruments to replicate the effects of the optimal monetary policy when the zero-lower bound on nominal interest rate is binding.…”

Section: Introductionmentioning

confidence: 99%

Fiscal Devaluations

Farhi¹,

Gopinath²,

Itskhoki³

2011

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We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptionsproducer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation-one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

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Unconventional Fiscal Policy at the Zero Bound

Cited by 133 publications

References 15 publications

Exchange rate flexibility under the zero lower bound

Exchange rate flexibility under the zero lower bound

Optimal government spending at the zero lower bound: A non-Ricardian analysis

Fiscal Devaluations

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