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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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    Cited by:

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    2. Nasir, Muhammad Ali, 2021. "Zero Lower Bound and negative interest rates: Choices for monetary policy in the UK," Journal of Policy Modeling, Elsevier, vol. 43(1), pages 200-229.
    3. Kavanagh, Ella & Zhu, Sheng & O’Sullivan, Niall, 2022. "Monetary policy, trade-offs and the transmission of UK Monetary Policy," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1128-1147.
    4. 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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    Keywords

    Recession; Fiscal Policy; Tax Rebate;
    All these keywords.

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