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Optimal Budgetary Policies in New-Keynesian Models: Can they help when the Zero Lower Bound is binding?

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  • Séverine Menguy
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    In case of productivity or taxation rates shocks, monetary policy can perfectly stabilize average variables in all the monetary union when the Zero Lower Bound is not binding. So, the national budgetary policy should only stabilize asymmetric shocks and the differential of these idiosyncratic shocks with their average values in all the monetary union. On the contrary, when the ZLB is binding, monetary policy loses its efficiency to stabilize average shocks in all the monetary union. Budgetary policies should then be expansionary, in order to reduce the recessionary and deflationary tensions due to symmetric positive productivity shocks or to declines in average taxation rates in all member countries. The national budgetary policy should be more active, in order to stabilize not only differentials in the persistence of shocks between the national country and the rest of the monetary union, but also average global shocks. Therefore, budgetary policies could be more useful in a ZLB framework, provided they are not constrained by the fiscal situation and the indebtedness level of the national country.

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    File URL: http://www.riskmarket.co.uk/bae/journals-articles/issues/optimal-budgetary-policies-in-new-keynesian-models-can-they-help-when-the-zero-lower-bound-is-binding/?download=attachment.pdf
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    Article provided by Risk Market Journals in its journal Bulletin of Applied Economics.

    Volume (Year): 3 (2016)
    Issue (Month): 2 ()
    Pages: 43-98

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    Handle: RePEc:rmk:rmkbae:v:3:y:2016:i:2:p:43-98
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