"Overcoming the zero interest-rate bound: A quantitative prescription (Revision of Working Paper No. 2006-14)"

Abstract

Using a macroeconometric model we provide a quantitative estimate of the cash transfer or tax cut that would achieve recovery from a severe recession when the central bank is unable to achieve full recovery because of the zero bound. We introduce an automatic transfer and simulate its triggering in the severe recession. We find that an automatic transfer that averages 3% of quarterly GDP repeated four times (quarterly) reduces the unemployment rate an additional full percentage point and thereby completes the recovery.   We recommend that legislatures enact an automatic counter-cyclical fiscal policy that will assure adequate stimulus without generating a long-term debt problem.Zero-interest rate bound, Counter-cyclical fiscal policy