Munich Personal RePEc Archive

Could Fiscal Policies Overcome a Deep Recession at the Zero Lower Bound?

Liu, Shih-fu and Huang, Wei-chi and Lai, Ching-chong (2020): Could Fiscal Policies Overcome a Deep Recession at the Zero Lower Bound?

[img]
Preview
PDF
MPRA_paper_101282.pdf

Download (1MB) | Preview

Abstract

This paper sets up a New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy, and uses it to explore whether the supportive fiscal instruments (including expansionary government spending, a payroll tax cut, and a financial assets tax cut) are effective in overcoming a deep recession. The salient feature of this study is that it provides a new dynamic viewpoint of regime switching by evaluating each of several supportive fiscal policies in terms of their performance in alleviating a deep recession. Two main findings emerge from the analysis. First, when the monetary authority implements the zero lower bound interest rate policy to dampen the negative natural rate shock, the economy will sink into a deep recession with deflation. Second, to overcome the deep recession, of the three supportive fiscal tools (i.e., expansionary government spending, a payroll tax cut, and a financial assets tax cut), only expansionary government spending is effective in alleviating the deep recession. More specifically, the implementation of fiscal policy in the form of either the payroll tax cut or the financial assets tax cut will only further deepen the recession.

Logo of the University Library LMU Munich
MPRA is a RePEc service hosted by
the University Library LMU Munich in Germany.