Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97780
Authors: 
Burgert, Matthias
Schmidt , Sebastian
Year of Publication: 
2013
Series/Report no.: 
IMFS Working Paper Series 72
Abstract: 
How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
Subjects: 
Monetary Policy
Fiscal Policy
Deficit spending
Discretion
Zero nominal interest rate bound
New Keynesian model
JEL: 
E31
E52
E62
E63
D11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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