Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172932
Authors: 
Bianchi, Francesco
Melosi, Leonardo
Year of Publication: 
2016
Series/Report no.: 
Working Paper 2016-16
Abstract: 
We show that policy uncertainty about how the rising public debt will be stabilized accounts for the lack of deflation in the US economy at the zero lower bound. We first estimate a Markov-switching VAR to highlight that a zero-lower-bound regime captures most of the comovements during the Great Recession: a deep recession, no deflation, and large fiscal imbalances. We then show that a micro-founded model that features policy uncertainty accounts for these stylized facts. Finally, we highlight that policy uncertainty arises at the zero lower bound because of a trade-off between mitigating the recession and preserving long-run macroeconomic stability.
Subjects: 
Monetary and fiscal policies
Policy uncertainty
zero lower bound
Markov-switching models
Bayesian methods
JEL: 
E31
E52
E62
E63
D83
Document Type: 
Working Paper

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