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Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates

By: Contributor(s): Material type: Continuing resourceContinuing resourcePublication details: American Economic Journal: Macroeconomics; 2024Description: 35-76ISSN:
  • 1945-7707
Subject(s): Online resources: Summary: We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound.
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Article Index Article Index Dr VKRV Rao Library Vol. 16, No. 4 Not for loan AI836

We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound.

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