Lima, Gilberto Tadeu
[VerfasserIn];
Setterfield, Mark
[VerfasserIn];
Silveira, Jaylson Jair da
[VerfasserIn]
Achieving two policy targets with one policy instrument
: heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound
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Titel:
Achieving two policy targets with one policy instrument
:
heterogeneous expectations, countercyclical fiscal policy, and macroeconomic stabilization at the effective lower bound
Beschreibung:
We explore the short-term macrodynamics of stabilization policy at the effective lower bound (ELB) of the nominal interest rate, in an environment characterized by heterogenous and endogenously time-varying private-sector output and inflation expectations driven by evolutionary dynamics. We show that at the ELB, fiscal policy conducted in accordance with a well-specified policy rule is particularly effective for purposes of macroeconomic stabilization. This is because fiscal interventions have both a direct effect on output and inflation (via aggregate demand formation) and an indirect effect on these same target variables, via the management of heterogenous and evolving expectations. As a result of the two channels through which it operates, and seemingly despite the logic of the Tinbergen (targets-instruments) principle, fiscal policy is thus revealed as a single policy instrument capable of achieving two policy goals.