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Fiscal activism and the zero nominal interest rate bound

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  • Schmidt, Sebastian
Abstract
I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policy-maker who cares less about the stabilisation of government spending relative to inflation and output gap stabilisation than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policy-maker uses government spending more aggressively to stabilise inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policy-maker corrects for discretionary authorities JEL Classification: E52, E62, E63

Suggested Citation

  • Schmidt, Sebastian, 2014. "Fiscal activism and the zero nominal interest rate bound," Working Paper Series 1653, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20141653
    Note: 2179645
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    References listed on IDEAS

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    Cited by:

    1. Piotr Krajewski & Agata Szymanska, 2019. "The effectiveness of fiscal policy within business cycle-Ricardians vs. non-Ricardians approach," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 19(2), pages 195-215.
    2. Bańkowski, Krzysztof, 2023. "Fiscal policy in the semi-structural model ECB-BASE," Working Paper Series 2802, European Central Bank.
    3. Nakata, Taisuke & Schmidt, Sebastian, 2019. "Conservatism and liquidity traps," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 37-47.
    4. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    5. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    6. Hettig, Thomas & Müller, Gernot J., 2018. "Fiscal policy coordination in currency unions at the effective lower bound," Journal of International Economics, Elsevier, vol. 115(C), pages 80-98.

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    More about this item

    Keywords

    discretion; fiscal policy; monetary policy; zero nominal interest rate bound;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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