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Some unpleasant properties of loglinearized solutions when the nominal rate is zero

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Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model's implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2012-05.

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Length: 69 pages
Date of creation: 2012
Date of revision: 01 Nov 2015
Handle: RePEc:fip:fedawp:2012-05
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