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

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 September 2015

Working Paper No. 553
By R Anton Braun, Lena Boneva and Yuichiro Waki 

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 labour tax rate is cut and the government purchase multiplier is less than 1.05

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