Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269122 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2715
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We analyse the effectiveness of optimal simple and implementable monetary and fiscal policy rules in stabilising economic activity, inflation and government debt in face of an occasionally binding lower bound on the nominal interest rate in a New Keynesian model. We show that, within the traditional assignment of active monetary policy and passive fiscal policy, the optimal fiscal policy rule features a strong counter-cyclical response to the deviation of inflation from the central bank's target - providing significant macroeconomic stabilisation especially at the lower bound - while also featuring a strong response to government debt. Our quantitative results show that the optimal counter-cyclical fiscal feedback to inflation significantly improves welfare and reduces the lower-bound frequency. In addition, the optimal simple monetary and fiscal rules almost completely resolve the deflationary bias associated with the lower bound.
Subjects: 
Fiscal Rules
Zero Lower Bound
Inflation Targeting
Deflationary Bias
JEL: 
E31
E52
E61
E62
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5300-9
Document Type: 
Working Paper

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