Title: Monetary and fiscal remedies for deflation
First published: 2004
Description: "Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals.  In an earlier paper, we showed that this reasoning does not hold, that open-market operations can provide substantial macroeconomic benefits and facilitate the use of powerful fiscal policy tools even in a liquidity trap.  In this paper, we consider an alternative approach that has been suggested for use in a liquidity trap, a scheduled increase in consumption tax rates.  We find that such a policy could, indeed, increase short-run consumption, but would be less effective at increasing welfare or accelerating a country's exit from a liquidity trap.  Though a variant of this tax policy might induce exit from a liquidity trap, the impact of welfare is negative in this case as well.  We also argue that this alternative tax-rate-based approach is subject to more severe credibility problems than the monetary policy approach explored in our original paper"--National Bureau of Economic Research web site.
Subjects: Econometric models, Monetary policy, Deflation (Finance), Fiscal policy
LC classification: HB1