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Supply-Side Policies and the Zero Lower Bound

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  • Pablo Guerron-Quintana

    (Federal Reserve Bank of Philadelphia)

  • Juan Rubio-Ramirez

    (Duke University)

  • Jesus Fernandez-Villaverde

    (University of Pennsylvania)

Abstract

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 104.

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Date of creation: 2012
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Handle: RePEc:red:sed012:104

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  1. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh Gramont, 2011. "How Big (Small?) Are Fiscal Multipliers?," IMF Working Papers 11/52, International Monetary Fund.
  2. N. Gregory Mankiw & Matthew C. Weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," NBER Working Papers 17029, National Bureau of Economic Research, Inc.
  3. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  4. Ivan Werning, 2011. "Managing a Liquidity Trap: Monetary and Fiscal Policy," NBER Working Papers 17344, National Bureau of Economic Research, Inc.
  5. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan Rubio-Ramirez, 2011. "Fiscal Volatility Shocks and Economic Activity," PIER Working Paper Archive 11-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
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  1. > Macroeconomics > Monetary Theory
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Cited by:
  1. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  2. Nicholas Crafts, 2013. "Long-Term Growth in Europe: What Difference does the Crisis Make?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 224(1), pages R14-R28, May.

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