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Overcoming the zero interest-rate bound: A quantitative prescription (Revision of Working Paper No. 2006-14)

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Author Info

  • Kenneth A. Lewis

    ()
    (Department of Economics,University of Delaware)

  • Laurence S. Seidman

    ()
    (Department of Economics,University of Delaware)

Abstract

Using a macroeconometric model we provide a quantitative estimate of the cash transfer or tax cut that would achieve recovery from a severe recession when the central bank is unable to achieve full recovery because of the zero bound. We introduce an automatic transfer and simulate its triggering in the severe recession. We find that an automatic transfer that averages 3% of quarterly GDP repeated four times (quarterly) reduces the unemployment rate an additional full percentage point and thereby completes the recovery. We recommend that legislatures enact an automatic counter-cyclical fiscal policy that will assure adequate stimulus without generating a long-term debt problem.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-04.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 08-04.

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Length: 25 pages
Date of creation: 2008
Date of revision:
Publication status: Published in Journal of Policy Modeling
Handle: RePEc:dlw:wpaper:08-04.

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: Zero-interest rate bound; Counter-cyclical fiscal policy;

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