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Escaping the Great recession

Listed author(s):
  • Leonardo Melosi

    (Federal Reserve Bank of Chicago)

  • Francesco Bianchi

    (Cornell University)

High uncertainty is an inherent implication of the zero lower bound, while deflation is not because of inflationary pressure due to uncertainty about how debt will be stabilized. We show that policy uncertainty empirically accounts for the absence of deflation in the US economy. Announcing fiscal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning fiscal discipline, at the cost of increasing macroeconomic instability. The policy trade-off can be resolved by committing to inflating away only the portion of debt accumulated during the recession.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_1035.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1035.

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Date of creation: 2015
Handle: RePEc:red:sed015:1035
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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