The role of fiscal policy : a survey of recent empirical findings

DSGE models based on New Keynesian principles, which have been extended to allow for banking, the zero lower bound on interest rates (ZLB), and varying price duration, can account well for recent macroeconomic behavior across a variety of economies. These models Önd that active Öscal policy can contribute to macroeconomic stability and welfare by reducing the frequency of hitting the ZLB. Fiscal policy can also share the stabilisation role with monetary policy, whose e§ectiveness under the ZLB is much reduced.