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Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates
Author(s) -
SCHMIDT SEBASTIAN
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12054
Subject(s) - economics , zero lower bound , nominal interest rate , fiscal policy , monetary policy , new keynesian economics , monetary economics , interest rate , government spending , stabilization policy , zero (linguistics) , welfare , macroeconomics , keynesian economics , real interest rate , market economy , linguistics , philosophy
I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short‐term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.