Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 410: Seemingly Irresponsible but Welfare Improving Fiscal Policy at the Lower Bound
Roberto M. Billi () and Carl E. Walsh ()
Additional contact information
Roberto M. Billi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Carl E. Walsh: University of California, Santa Cruz
Abstract: In this paper, we evaluate the consequences of super-active Öscal policy rulesó that is, rules that call for tax cuts and/or spending increases as the governmentís debt level risesó in a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate. We show that such seemingly irresponsible, debt-Önanced Öscal stimulus at the ZLB, unbacked by any promise of future tax increases or spending cuts, not only improves economic stability by acting as an automatic stabilizer, but also, somewhat paradoxically, reduces government debt accumulation. When evaluated using a model-consistent measure of welfare, Öscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to ináation, outperform a monetary policy that responds strongly to ináation and reduce the frequency of episodes at the ZLB.
Keywords: automatic stabilizers; Öscal and monetary interactions; government debt
Language: English
49 pages, February 1, 2022
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