Comments on Epidemics in the New Keynesian model by Eichenbaum, Rebelo, and Trabandt"
In: Journal of economic dynamics & control, Band 140, S. 104307
ISSN: 0165-1889
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In: Journal of economic dynamics & control, Band 140, S. 104307
ISSN: 0165-1889
In: FRB of Chicago Working Paper No. WP-2016-14
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Working paper
In: NBER International Seminar on Macroeconomics, Band 9, Heft 1, S. 174-179
ISSN: 2150-8372
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In: FRB of Chicago Working Paper No. 2012-05
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In: FRB of Chicago Working Paper No. 2023-03
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In: Deutsche Bundesbank Discussion Paper No. 34/2021
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In: FRB of Chicago Working Paper No. 2020-31
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In: CEPR Discussion Paper No. DP15482
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In: Journal of Monetary Economics, Band 104, S. 1-22
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In: American economic review, Band 107, Heft 4, S. 1030-1058
ISSN: 1944-7981
We show that policy uncertainty about how the rising public debt will be stabilized accounts for the lack of deflation in the US economy at the zero lower bound. We first estimate a Markov-switching VAR to highlight that a zero-lower-bound regime captures most of the comovements during the Great Recession: a deep recession, no deflation, and large fiscal imbalances. We then show that a microfounded model that features policy uncertainty accounts for these stylized facts. Finally, we highlight that policy uncertainty arises at the zero lower bound because of a trade-off between mitigating the recession and preserving long-run macroeconomic stability. (JEL E31, E32, E52, E62, G01, H63)
What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
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