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Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription

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  • 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.

Suggested Citation

  • Kenneth Lewis & Laurence Seidman, 2006. "Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription," Working Papers 06-14, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:06-14
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    References listed on IDEAS

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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.
    2. Merola, Rossana, 2010. "Financial frictions and the zero lower bound on interest rates: a DSGE analysis," MPRA Paper 29365, University Library of Munich, Germany.

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    Keywords

    Recession; Fiscal Policy; Tax Rebate;

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