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Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription

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Author Info

  • Kenneth Lewis

    ()
    (Department of Economics,University of Delaware)

  • Laurence Seidman

    ()

Abstract

Two recent empirical studies of the 2001 recession published in the American Economic Review imply that an old-fashioned Keynesian fiscal stimulus—a cash transfer (“tax rebate”) or tax cut to households-- can overcome the zero interest-rate bound problem. We provide a quantitative estimate of the cash transfer that would achieve recovery from a severe recession when confronted with the zero bound. We obtain our result by adapting and simulating a macro-econometric model that has been recently econometrically estimated. With the interest rate near zero, a cash transfer equal to 3% of quarterly GDP repeated four times (quarterly) would reduce the unemployment rate nearly a full percentage point.

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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-14.

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Length: 23 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-14

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Postal: Purnell Hall, Newark, Delaware 19716
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Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: Recession; Fiscal Policy; Tax Rebate;

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References

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  1. Seidman, Laurence S & Lewis, Kenneth A, 2002. "A New Design for Automatic Fiscal Policy," International Finance, Wiley Blackwell, vol. 5(2), pages 251-84, Summer.
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Cited by:
  1. Dai, Meixing, 2011. "Quantitative and credit easing policies at the zero lower bound on the nominal interest rate," MPRA Paper 28129, University Library of Munich, Germany.

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