Fiscal and monetary stabilization policy at the zero lower bound: Consequences of limited foresight

Woodford, Michael; Xie, Yinxi

doi:10.1016/j.jmoneco.2021.11.003

Cited by 28 publications

(3 citation statements)

References 32 publications

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“…Farhi and Werning (2019) study the combination of level‐

k

thinking, incomplete markets, and occasionally binding borrowing constraints and find that all features together provide a solution to the forward‐guidance puzzle, but they abstract their analysis from the ZLB. Recent work by Woodford (2018), Woodford and Xie (2019, 2022), and Xie (2020) study a different aspect of limitations to fully rational expectations formation—namely, finite planning horizons. A related, but conceptually different, literature addresses higher‐order beliefs.…”

Section: Related Literaturementioning

confidence: 99%

Expectations Formation, Sticky Prices, and the ZLB

Bersson¹,

Hürtgen²,

Paustian³

2023

J of Money Credit Banking

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At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level‐k thinking, a form of bounded rationality formalized by García‐Schmidt and Woodford (2019) and Farhi and Werning (2019), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level‐k thinking prescribes keeping the nominal rate lower for longer, but short‐run macro‐economic stabilization is less powerful compared to rational expectations.

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“…Farhi and Werning (2019) study the combination of level‐

k

Section: Related Literaturementioning

confidence: 99%

Expectations Formation, Sticky Prices, and the ZLB

Bersson¹,

Hürtgen²,

Paustian³

2023

J of Money Credit Banking

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“…Ali al-Nowaihi and Dhami (2016) argue that under the possibility of a liquidity trap, the monetary stimulus can soon be exhausted when the discretion on fiscal policy is retained. Woodford and Xie (2022) point out that welfare can be maximized when the monetary and fiscal policies are contemporaneously committed as the ZLB is dissipated. Coenen et al (2012), Farhi andWerning (2016), andDime et al (2021) insist that fiscal multipliers are larger when the government spending is accommodated by the monetary policy or when the nominal rate is near ZLB.…”

Section: Liquidity Trap and Fiscal Shocksmentioning

confidence: 99%

Stabilizer or multiplier: The manifestation of theoretical policy effect on the house prices

Kim¹

2023

J. Hous. Urban Finance

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This paper employs Jorda's (2005) local projection (LP) methodology to assess the impact of macroeconomic policies on apartment prices pre-and post-COVID-19. It contemplates the economic linkages to estimate the multiplier effects of the monetary and fiscal shocks as they are transmitted to the apartment prices through the so-called COVID proxies. This paper introduces a reduced number of economic proxies that substantially explain the impact of the COVID-19 pandemic on aggregate production in South Korea: unemployment; oil prices; uncertainties. I use these COVID proxies that are exogenously given, as a set of channels through which the transmission paths of the macroeconomic policies linked towards the apartment prices are misaligned with the desired paths. The LP model provides a reasonably good explanation to the varying effects of financial shocks pre-and post-COVID-19 by predicting the state-dependent impulse responses. The impulse responses suggest that the monetary multipliers on apartment prices are larger and more significant during the COVID-19 crisis than during normal times, while it is vice versa in terms of fiscal multipliers.

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“…Garga and Singh (2021) study optimal monetary policy in a New Keynesian DSGE model with Schumpeterian growth through R&D. Estimated, medium-scale DSGE models with endogenous growth through innovation investment include Moran and Queralto (2018), Anzoategui et al (2019), Bianchi et al (2019), Ikeda and Kurozumi (2019), and Elfsbacka Schm öller and Spitzer (2021) and key insights include the effect of demand and monetary policy shocks 2 In models without public debt, the Taylor Principle may not be sufficient for determinacy if capital and investment are present (Carlstrom and Fuerst (2005)), or under an ad hoc learning-by-doing mechanism (Micheli (2018)), or in a HANK model with counter-cyclical income risk (Acharya and Dogra (2020), Bilbiie (2021)). The Taylor Principle may not be necessary for determinacy if agents are myopic (Gabaix (2020)), have finite planning horizons (Woodford and Xie (2022)), social memory frictions ), imperfect common knowledge (Angeletos and Lian (2018)), face a cost channel (Beaudry et al (2024)), or in a HANK setting with pro-cyclical income risk (Acharya and Dogra (2020)).…”

Section: Conditions For Stabilitymentioning

confidence: 99%