Restoring Existence and Uniqueness at the Effective Lower Bound with Simple Fiscal Policy

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Abstract

The presence of an occasionally binding constraint from the effective lower bound (ELB) in New Keynesian models often leads to multiple or no equilibria. The problem stems from a strong feedback loop between expectations (of inflation and output) and current outcomes at the ELB. We show that simple fiscal policy rules can introduce additional stabilising forces that dampen this loop, thereby ensuring the existence and uniqueness of an equilibrium.

Blanchard-Kahn and Coherency-Completeness Regions for the NK Model with the ELB and Persistent Fiscal Policy

Seminars and Presentations

2023: University of Pavia (internal seminar), University of Oxford (internal seminar), London Business School (Transatlantic Doctoral Conference), IP Paris/CREST (internal seminar), Joint Research Centre of the European Commission (Dynare Advanced Workshop), University of Warsaw (Warsaw MMF Conference), Bank of Malta (Dynare Conference)
2024: Queen’s University Belfast (Royal Economic Society Conference), Sapienza University (Sailing the Macro Conference)
2025: Waseda University (3rd RISE Workshop)

Citation:

Murakami, David, Ivan Shchapov, and Yifan Zhang, It is Taxing to be Coherent (January 17, 2023). Available at SSRN: https://ssrn.com/abstract=4326398 or http://dx.doi.org/10.2139/ssrn.4326398