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Supply-Side Policies and the Zero Lower Bound

  • Jesús Fernández-Villaverde
  • Pablo A. Guerrón-Quintana
  • Juan Rubio-Ramírez

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17543.

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Date of creation: Oct 2011
Date of revision:
Publication status: published as IMF Economic Review (2014) 62, 248–260. doi:10.1057/imfer.2014.10; published online 15 July 2014 Supply-Side Policies and the Zero Lower Bound Jesús Fernández-Villaverde*, Pablo Guerrón-Quintana* and Juan F Rubio-Ramírez*
Handle: RePEc:nbr:nberwo:17543
Note: EFG
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  1. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan Rubio-Ramirez, 2011. "Fiscal Volatility Shocks and Economic Activity," PIER Working Paper Archive 11-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Ivan Werning, 2011. "Managing a Liquidity Trap: Monetary and Fiscal Policy," NBER Working Papers 17344, National Bureau of Economic Research, Inc.
  3. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  4. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," NBER Working Papers 16479, National Bureau of Economic Research, Inc.
  5. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December.
  6. Weinzierl, Matthew Charles & Eggertsson, Gauti B. & Blanchard, Olivier & Mankiw, N. Gregory, 2011. "An Exploration of Optimal Stabilization Policy," Scholarly Articles 11177699, Harvard University Department of Economics.
  7. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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