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MONETARY AND FISCAL POLICY DESIGN AT THE ZERO LOWER BOUND: EVIDENCE FROM THE LAB
Author(s) -
Hommes Cars,
Massaro Domenico,
Salle Isabelle
Publication year - 2019
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12741
Subject(s) - liquidity trap , economics , market liquidity , zero lower bound , fiscal policy , monetary policy , monetary economics , inflation (cosmology) , inflation targeting , macroeconomics , liquidity risk , physics , theoretical physics
The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation‐driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger‐than‐unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. ( JEL E70, C92, D83, D84, E52, E62)