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Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription

  • Kenneth Lewis

    ()

    (Department of Economics,University of Delaware)

  • Laurence Seidman

    ()

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.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-14.pdf
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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-14.

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Length: 23 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-14
Contact details of provider: Postal: Purnell Hall, Newark, Delaware 19716
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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/

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