Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/274240 
Year of Publication: 
2023
Series/Report no.: 
FMM Working Paper No. 86
Publisher: 
Hans-Böckler-Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FMM), Düsseldorf
Abstract: 
We explore the short-term macrodynamics of stabilization policy at the effective lower bound (ELB) of the nominal interest rate, in an environment characterized by heterogenous and endogenously time-varying private-sector output and inflation expectations driven by evolutionary dynamics. We show that at the ELB, fiscal policy conducted in accordance with a well-specified policy rule is particularly effective for purposes of macroeconomic stabilization. This is because fiscal interventions have both a direct effect on output and inflation (via aggregate demand formation) and an indirect effect on these same target variables, via the management of heterogenous and evolving expectations. As a result of the two channels through which it operates, and seemingly despite the logic of the Tinbergen (targets-instruments) principle, fiscal policy is thus revealed as a single policy instrument capable of achieving two policy goals.
Subjects: 
Stabilization policy
effective lower bound
fiscal policy
heterogeneous inflation and outputexpectations
satisficing evolutionary dynamics
JEL: 
E12
E52
E62
E63
E71
Creative Commons License: 
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Document Type: 
Working Paper

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