MONETARY AND FISCAL POLICY DESIGN AT THE ZERO LOWER BOUND: EVIDENCE FROM THE LAB

Domenico Massaro, Cars Hommes, Isabelle Salle

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation-driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger-than-unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62).
Original languageEnglish
Pages (from-to)1120-1140
Number of pages21
JournalEconomic Inquiry
Volume57
DOIs
Publication statusPublished - 2019

Keywords

  • Business, Management and Accounting (all)
  • Economics and Econometrics

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