I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents, nonseparable preferences over consumption and real money balances, and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self-fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes-implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories-are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity-trap steady state exist, causing global indeterminacy.
Piergallini, A. (2023). Fiscal Stimulus of Last Resort. JOURNAL OF MONEY, CREDIT, AND BANKING, 1-36 [10.1111/jmcb.13014].
Fiscal Stimulus of Last Resort
Piergallini, A
2023-01-01
Abstract
I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents, nonseparable preferences over consumption and real money balances, and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self-fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes-implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories-are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity-trap steady state exist, causing global indeterminacy.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.