Supply-Side Policies and the Zero Lower Bound

Supply-side policies can play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Reductions in mark-ups or future increases in productivity triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in interest rates do not undo this wealth effect. The paper illustrates this mechanism with a New Keynesian model.

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Year of publication:	2014
Authors:	Fernández-Villaverde, Jesús ; Guerrón-Quintana, Pablo ; Rubio-Ramírez, Juan F
Published in:	IMF Economic Review. - Palgrave Macmillan, ISSN 2041-4161. - Vol. 62.2014, 2, p. 248-260
Publisher:	Palgrave Macmillan

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Extent:	application/pdf text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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