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Fiscal activism and the zero nominal interest rate bound

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  • Schmidt, Sebastian

Abstract

I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policy-maker who cares less about the stabilisation of government spending relative to inflation and output gap stabilisation than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policy-maker uses government spending more aggressively to stabilise inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policy-maker corrects for discretionary authorities JEL Classification: E52, E62, E63

Suggested Citation

  • Schmidt, Sebastian, 2014. "Fiscal activism and the zero nominal interest rate bound," Working Paper Series 1653, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20141653
    Note: 2179645
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    References listed on IDEAS

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    Cited by:

    1. Nakata, Taisuke & Schmidt, Sebastian, 2019. "Conservatism and liquidity traps," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 37-47.
    2. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    3. Hettig, Thomas & Müller, Gernot J., 2018. "Fiscal policy coordination in currency unions at the effective lower bound," Journal of International Economics, Elsevier, vol. 115(C), pages 80-98.

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    More about this item

    Keywords

    discretion; fiscal policy; monetary policy; zero nominal interest rate bound;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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