The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation-driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger-than-unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62).

Monetary and fiscal policy design at the zero lower bound: evidence from the lab / C. Hommes, D. Massaro, I. Salle. - In: ECONOMIC INQUIRY. - ISSN 0095-2583. - 57:2(2019 Apr), pp. 1120-1140. [10.1111/ecin.12741]

Monetary and fiscal policy design at the zero lower bound: evidence from the lab

D. Massaro;
2019

Abstract

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation-driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger-than-unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62).
Business; Management and Accounting (all); Economics and Econometrics
Settore SECS-P/01 - Economia Politica
Settore SECS-P/02 - Politica Economica
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/820817
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