Fiscal Stimulus of Last Resort
Abstract
I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents 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.
Keywords
Cite
@article{arxiv.2104.02753,
title = {Fiscal Stimulus of Last Resort},
author = {Alessandro Piergallini},
journal= {arXiv preprint arXiv:2104.02753},
year = {2021}
}