Global policy at the zero lower bound in a large-scale DSGE model. (February 2015)

• Record Type: Journal Article
• Authors: Gomes, S.; Jacquinot, P.; Mestre, R.; Sousa, J.
• Is Part Of: Journal of international money and finance. Volume 50(2015)
• Page Start: 134
• Page End: 153
• Publication Date: 2015-02
• Subjects: Zero lower bound -- Fiscal multipliers -- Monetary policy -- Dynamic general equilibrium models; E52 -- E62 -- E63 -- F42; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2014.09.005
• Languages: English
• ISSNs: 0261-5606

Abstract

Abstract: This paper analyses whether fiscal policies can alleviate the effects of a global recession that drives interest rates to the zero lower bound. Additionally, we study the benefits of international coordination. The analysis is carried out using a dynamic general equilibrium model of the global economy (EAGLE model). We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a zero lower bound situation that amplify the effects of fiscal shocks compared to the non-zero lower bound case. International coordination is helpful but does not play a major role in the results. Highlights: We quantitatively analyse fiscal policy options with a large scale DSGE model. We assess policy's effectiveness when a global recession leads rates to zero. Significant non-linearities at the lower bound amplify the effects of fiscal shocks. International coordination is helpful but does not play a major role in the results. We analyse fiscal packages announced in 2008/09 and options for consolidation.