nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒05‒12
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example By Lars E.O. Svensson
  2. Does Inflation Targeting Matter? A Reassessment By Luke B. Willard
  3. Money Demand in Estonia By Boriss Siliverstovs
  4. Does single monetary policy have asymmetric real effects in EMU ? By Marilyne Huchet-Bourdon
  5. Monetary Policy and Japan’s Liquidity Trap By Lars E.O. Svensson
  6. Money, output and the payment system: Optimal monetary policy in a model with hidden effort By Joseph H. Haslag; Joydeep Bhattacharya; Antoine Martin
  7. Monetary Policy in an Economy Sick with Dutch Disease By Kirill Sosunov; Oleg Zamulin
  8. The Continental Dollar: How Much Was Issued and What Happened to It? By Farley Grubb
  9. Why has Core Inflation Remained so Muted in the Face of the Oil Shock? By Paul van den Noord; Christophe André
  10. Reserve levels and intraday federal funds rate behavior By Spence Hilton; Warren B. Hrung
  11. Optimal monetary policy under a floating regime with non-atomistic wage setters By Vincenzo Cuciniello
  12. Phillips Curve for Advanced Economies on Period 1996-2007 - United States and Euro Area Case By Manuel, Eduardo
  13. Why does overnight liquidity cost more than intraday liquidity? By Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
  14. The Timing and Magnitude of Exchange Rate Overshooting By Niklas J. Westelius; Mathias Hoffmann; Jens Sondergaard
  15. Inflation in Croatia with outlook to future By Paunić, Alida
  16. Is Latin America an Optimal Currency Area? Evidence from a Structural Vector Auto-regression analysis By Foresti, Pasquale
  17. Housing Markets and Adjustment in Monetary Union By Peter Hoeller; David Rae
  18. Sales and the real effects of monetary policy By Patrick J. Kehoe; Virgiliu Midrigan
  19. Liquidity-saving mechanisms By Antoine Martin; James McAndrews
  20. Monetary Policy Today: Sixteen Questions and about Twelve Answers By Alan S. Blinder
  21. The Yield Curve through Time and Across Maturities By Richard Startz; Kwok Ping Tsang
  22. Persistent Appreciations and Overshooting: A Normative Analysis By Ricardo J. Caballero; Guido Lorenzoni
  23. Win or Lose, It’s the Policy We Choose: Comparative economic performance of the inflation targeters By Beja, Jr., Edsel
  24. Improving Monetary Policy Models By Christopher A. Sims
  25. Global Currency Hedging By John Y. Campbell; Karine Serfaty-de Medeiros; Luis M. Viceira
  26. "Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription" By Kenneth Lewis; Laurence Seidman

  1. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: The introduction of inflation targeting has led to major progress in practical monetary policy. Recent debate has focused on the interest-rate assumption underlying published projections of inflation and other target variables. This paper discusses the role of alternative interest-rate paths in the monetary-policy decision process and the recent publication by Norges Bank (the central bank of Norway) of optimal interest-rate projections with fan charts.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy.
    JEL: E42 E52 E58
    Date: 2006–05
  2. By: Luke B. Willard (Princeton University)
    Abstract: This paper uses a number of identification approaches (using instrumental variables, assumptions about heteroscedasticity and panel fixed effects) to estimate the effect of inflation targeting on inflation. Generally, it finds the effect is small and insignificant.
    Keywords: Inflation; Monetary policy
    JEL: E31 E52
    Date: 2006–02
  3. By: Boriss Siliverstovs
    Abstract: This study develops a parsimonious stable coefficient money demand model for Estonia for the period from 1995 till 2006. Using the Johansen Full Information Maximum Likelihood framework the two cointegrating vectors are found among the system variables including the real money balances, the gross domestic product, the long- and short-term interest rates, and the rate of inflation. The first cointegrating vector is identified as the money demand function whereas the second as the interest rate parity. Our study contributes to better understanding of the factors shaping the demand for money in the new Member States of the European Union that committed themselves to adopting of the Euro currency in the near future.
    Keywords: M2 money demand, stability, new EU member states, Estonia
    JEL: C32 E41
    Date: 2007
  4. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - [CNRS : UMR6211] - [Université Rennes I][Université de Caen])
    Abstract: This article compares reactions of economies in Economic Monetary Union to a single monetary policy. For that, we estimate a reaction function supposed to represent the behaviour of European Central Bank over the period 1980-1998. Then residuals are introduced into the production equation of each country. We break up monetary shocks in two axes: first, anticipated against unanticipated shocks and then positive against negative shocks. These distinctions permit a best evaluation of the degree of homogeneity of the effects of monetary policy. France, Germany, Spain and Austria seem more sensitive to unanticipated interest rates increases contrary to Belgium and Italy. These results illustrate all the problem of single monetary policy.
    Keywords: monetary policy shocks, reaction function, asymmetric effects, Economic Monetary Union.
    Date: 2007–04–26
  5. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. Therefore, monetarypolicy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level. Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent. In an open economy, the Foolproof Way (consisting of a price-level target path, currency depreciation and commitment to a currency peg and a zero interest rate until the price-level target path has been reached) is likely to be the most effective policy to raise expectations of the future price level, stimulate the economy, and escape from a liquidity trap. It is the first-best policy to end stagnation and deflation in Japan. The Foolproof Way without the explicit exchange-rate policy, namely a price-level target path and a commitment to a zero interest rate until the price-level target path has been reached, would be a second-best policy. The current policy, a commitment to a zero interest rate until inflation has become nonnegative is at best a third-best policy, since it accommodates all deflation that has occurred before inflation turns nonnegative and therefore is not effective in inducing inflation expectations.
    Date: 2006–01
  6. By: Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Joydeep Bhattacharya; Antoine Martin
    Abstract: We propose a new explanation for the observed difference in the cost of intraday and overnight liquidity. We argue that the low cost of intraday liquidity is an application of the Friedman rule in an environment where a deviation of the Friedman rule is optimal with respect to overnight liquidity. In our environment the cost of overnight liquidity affects output while the cost of intraday liquidity only redistributes resources between money holders and non-money holders. We show that it is optimal to set a high overnight rate to reduce the incentives to overuse money. In contrast, intraday liquidity should have a low cost to provide risk-sharing.
    Keywords: Friedman rule; monetary policy; random-relocation models
    JEL: E31 E51 E58
    Date: 2007–03–14
  7. By: Kirill Sosunov (Higher School of Economics); Oleg Zamulin (New Economic School)
    Abstract: The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one - to inflation.
    Keywords: Dutch disease, Monetary Policy, Russia
    JEL: E52 F4
    Date: 2007–05
  8. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: The U.S. Congress issued paper money called Continental Dollars to finance the American Revolution. The story of the Continental Dollar is familiar to all - excessive amounts were issued causing hyper-inflation. It became worthless and was forgotten. However, the details of this story, including its veracity, are less well known. Scholars even disagree over how much was issued. Evidence is gathered to establish the exact amount and time path of Continental Dollars emitted and then remitted to the U.S. Treasury and burned. Why some Dollars were hoarded rather than trashed between 1779 and 1790 is also documented.
    Keywords: Monetary Policy, Economic History
  9. By: Paul van den Noord; Christophe André
    Abstract: To help policymakers form a judgment on inflation risks and the required monetary policy stance the OECD has developed an analytical framework based on a set of 'eclectic' Phillips curves estimated for the two largest OECD economies, the United States and the euro area, which is presented in this paper. This framework is used in the preparation of the Economic Outlook to explain recent developments in core inflation, excluding food and energy, based on developments in measures of economic slack (the output gap), spill-over effects from energy prices onto core inflation and lagged responses to past inflation via expectations formation. The fact that the knock-on effects from energy shocks onto core inflation appear small in comparison with the 1970s can be explained by the secular fall in energy intensity, a low and stable rate of 'mean inflation' -- to which observed inflation reverts after a shock has worked its way through -- and persistent slack in the aftermath of the bursting of the dotcom bubble. <P>Pourquoi l?inflation sous-jacente est elle restée si modérée en dépit du choc pétrolier ? <BR>Afin d'aider les décideurs politiques à apprécier les risques inflationnistes et l'orientation requise pour la politique monétaire, l'OCDE a développé un cadre analytique fondé sur un ensemble de courbes de Phillips 'éclectiques' estimées pour les deux plus grandes économies de l'OCDE, les États-unis et la zone euro, qui est présenté dans ce document. Ce cadre est utilisé dans la préparation des Perspectives économiques pour expliquer l'évolution récente de l'inflation sous-jacente, hors alimentation et énergie, en fonction de l'évolution de mesures de la robustesse de la conjoncture (l'écart de production), des effets de contagion des prix de l'énergie sur l'inflation sous-jacente et des réponses différées à l'inflation passée à travers la formation des anticipations. Le fait que les effets d'entraînement des prix de l'énergie sur l'inflation sous-jacente apparaissent faibles comparés aux années 1970 peut s'expliquer par la baisse séculaire de l'intensité énergétique, un taux d'inflation 'moyen' faible et stable -- vers lequel l'inflation observée converge une fois qu'un choc a été absorbé -- et par une faiblesse persistante de l'économie à la suite de l'éclatement de la bulle 'dotcom'.
    Keywords: monetary policy, politique monétaire, energy, énergie, inflation, inflation
    JEL: E31 E52 Q40
    Date: 2007–04–23
  10. By: Spence Hilton; Warren B. Hrung
    Abstract: We analyze the impact of aggregate reserve levels on the intraday behavior of the federal funds rate over a sample period extending from 2002 to 2005. We study both how the reserve levels accumulated earlier in a maintenance period influence the morning level of the funds rate relative to the target set by the FOMC, and how same-day reserve levels as well as the reserve levels accumulated earlier affect intraday movements of the funds rate. The impact of recurring calendar events on the behavior of the federal funds rate is also explored. In general, we find a negative relationship between our measures of reserve levels and our two measures of federal funds rate behavior.
    Keywords: Federal funds rate ; Bank reserves ; Monetary policy
    Date: 2007
  11. By: Vincenzo Cuciniello (Facoltà di Economia "Richard M. Goodwin" (Faculty of Economics), Università degli Studi di Siena (University of Siena))
    Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.
    Keywords: Central bank conservatism, centralization of wage setting, inflationary bias.
    JEL: E2 E42 E5 F31 F41
    Date: 2007–03–12
  12. By: Manuel, Eduardo
    Abstract: This paper explains and shows us the Phillips Curve for advanced economies on period 1996-2007 for specially for the United States and Euro area case. The informations for 2006 and 2007 was considered being in attention the forecasting of International Monetary Fund (IMF) for these years. We concluded that the true form of Phillips curve for short and long-run will not be verified always that exist equal evolution of their variables or for others words, always that inflation and unemployment rates growing to same direction, in both regions or in any region, the Phillips curve never will have their normal form and this just happen when inflation and unemployment rates growing for different directions (in the short-run) and when inflation rate is growing and unemployment doesn't (in the long-run).
    Keywords: Phillips curve; Inflation; Unemployment
    JEL: E23 E31 A22 E29 E13 E12 A23
    Date: 2006–06–28
  13. By: Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non?money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.>
    Keywords: Bank liquidity ; Payment systems ; Friedman, Milton ; Banks and banking, Central
    Date: 2007
  14. By: Niklas J. Westelius (Hunter College); Mathias Hoffmann (University of Cologne); Jens Sondergaard (Johns Hopkins University, Department of International Economics (SAIS))
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to over-shoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a New Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy?s sensitivity to exchange rate dynamic a¤ect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning.
    JEL: F41 F31 E31
    Date: 2007
  15. By: Paunić, Alida
    Abstract: Central Banks have gained much credibility in controlling one important macroeconomic variable: inflation. This paper tries to examine the relation between inflation and other economic variables in Croatia by searching for the best forecasting model.
    Keywords: inflation; modeling; unemployment
    JEL: E31 C53 C51
    Date: 2007–05
  16. By: Foresti, Pasquale
    Abstract: This paper evaluates the advisability of a monetary union in Latin America applying the theory of optimum currency areas (OCA). The analysis, based on the traditional OCA criteria, suggests that there is no evidence for any monetary integration in Latin America, even at a sub-regional level. Latin American countries have evidenced a low degree of trade integration and asymmetric co-movements among their shocks. Moreover, important differences in the speed of adjustment and size of shocks are found. Higher policy coordination seems to be necessary before starting any economic integration process in Latin America.
    JEL: C32 F0
    Date: 2007–08
  17. By: Peter Hoeller; David Rae
    Abstract: This paper highlights the factors that limit or increase cyclical divergence in the euro area and reviews one policy area that is important in fostering a speedy adjustment to shocks: the transmission of monetary policy via the housing market. A high interest rate sensitivity of housing markets is beneficial as monetary policy is more powerful in damping cyclical fluctuations overall in the euro area. However, housing and mortgage markets still differ widely, leading to asymmetric behaviour of individual countries. Large differences exist in home-ownership rates, financial markets, taxation and supply constraints. Moreover, it is important to have a financial system that can withstand asset price bubbles. In this context, the procyclicality of bank provisioning is of concern as it could lead to a credit crunch and reinforce a downturn. Prudential supervision across the area has become better co-ordinated, but still remains fragmented. <P>Marchés immobiliers et ajustement en union monétaire <BR>Cet article met en évidence les facteurs qui limitent ou renforcent les divergences cycliques au sein de la zone euro et il passe en revue un des aspects importants de la politique économique permettant de promouvoir un ajustement rapide aux chocs : la transmission de la politique monétaire via le marché immobilier. Une forte sensibilité du marché du logement aux taux d'intérêt est bénéfique car la politique monétaire est plus efficace pour amortir les fluctuations cycliques de façon générale dans la zone euro. Cependant, les marchés immobiliers et hypothécaires diffèrent encore fortement, ce qui conduit à des comportements asymétriques des différents pays. Des différences importantes existent du point de vue de la proportion des propriétaires de leur logement, des marchés financiers, de la fiscalité et des contraintes affectant l'offre. De plus, il est important d'avoir un système financier qui peut résister à des bulles financières. Dans ce contexte, le comportement pro-cyclique des banques en matière de provisionnement est problématique car il pourrait conduire à une réduction de l'offre de crédit et un renforcement du ralentissement. La supervision prudentielle dans l'ensemble de la zone est devenue mieux coordonnée, mais elle reste fragmentée.
    Keywords: housing market, marché immobilier, monetary union, union monétaire
    JEL: E32 G21 L74
    Date: 2007–04–17
  18. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large fraction of price changes are sales related, the models must either exclude sales from the data or leave them in and implicitly treat sales like any other price change. When sales are included, prices change frequently and standard sticky price models with this high frequency of price changes predict small effects from money shocks. If sales are excluded, prices change much less frequently and a standard sticky price model with this low frequency of price changes predict much larger effects of money shocks. This paper adds a motive for sales in a parsimonious extension of existing sticky price models. We show that the model can account for most of the patterns of sales in the data. Using our model as the data generating process, we evaluate the existing approaches and find that neither well approximates the real effects of money in our economy in which sales are explicitly modeled.
    Date: 2007
  19. By: Antoine Martin; James McAndrews
    Abstract: We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
    Keywords: Bank liquidity ; Payment systems ; Banks and banking ; Banks and banking, Central ; Monetary theory
    Date: 2007
  20. By: Alan S. Blinder (Princeton University)
    Abstract: My assignment is to survey the main questions swirling around monetary policy today. I emphasize three words in this sentence, each for a different reason. “Main” is because one person’s side issue is another’s main issue. So I had to be both selective and judgmental in compiling my list, else this paper would have been even longer than it is. “Policy” indicates that I have restricted myself to issues that are truly relevant to real-world policymakers, thus omitting many interesting but purely academic issues. “Today” means that I focus on current issues, thus passing over some illustrious past issues. All these omissions still leave a rather long list; so I will treat some issues quite briefly.
    Date: 2006–07
  21. By: Richard Startz; Kwok Ping Tsang
    Abstract: We develop an unobserved component model in which the short-term interest rate is composed of a stochastic trend and a stationary cycle. Using the Nelson-Siegel model of the yield curve as inspiration, we estimate an extremely parsimonious state-space model of interest rates across time and maturity. Our stochastic process generates a three-factor model for the term structure. At the estimated parameters, trend and slope factors matter while the third factor is empirically unimportant. Our baseline model fits the yield curve well. Model generated estimates of uncertainty are positively correlated with estimated term premia. An extension of the model with regime switching identifies a high-variance regime and a low-variance regime, where the high-variance regime occurs rarely after the mid-1980s. The term premium is higher, and more so for yields of short maturities, in the high-variance regime than that in the low-variance regime. The estimation results support our model as a simple and yet reliable framework for modeling the term structure.
    Date: 2007–03
  22. By: Ricardo J. Caballero; Guido Lorenzoni
    Abstract: Most economies experience episodes of persistent real exchange rate appreciations, when the question arises whether there is a need for intervention to protect the export sector. In this paper we present a model of irreversible destruction where exchange rate intervention may be justified if the export sector is financially constrained. However the criterion for intervention is not whether there are bankruptcies or not, but whether these can cause a large exchange rate overshooting once the factors behind the appreciation subside. The optimal policy includes ex-ante and ex-post interventions. Ex-ante (i.e., during the appreciation phase) interventions have limited effects if the financial resources in the export sector are relatively abundant. In this case the bulk of the intervention takes place ex-post, and is concentrated in the first period of the depreciation phase. In contrast, if the financial constraint in the export sector is tight, the policy is shifted toward ex-ante intervention and it is optimal to lean against the appreciation. On the methodological front, we develop a framework to study optimal dynamic interventions in economies with financially constrained agents.
    JEL: E0 E2 F0 F4 H2
    Date: 2007–05
  23. By: Beja, Jr., Edsel
    Abstract: The inflation-growth relationship for the inflation targeters is estimated for the period 2001-2006. Results show that while inflation is negatively correlated with growth, the indicators for aggregate expenditures and productivity are positively correlated with growth; thus a positive combination of policies can be more useful for broad-based macroeconomic performances.
    Keywords: Inflation targeting; inflation-growth tradeoff
    JEL: E31 O50 E50 O40 E60
    Date: 2007–04–25
  24. By: Christopher A. Sims (Princeton University and NBER)
    Abstract: If macroeconomic models are to be useful in policy-making, where uncertainty is pervasive, the models must be treated as probability models, whether formally or informally. Use of explicit probability models allows us to learn systematically from past mistakes, to integrate model-based uncertainty with uncertain subjective judgment, and to bind data-bassed forecasting together with theory-based projection of policy effects. Yet in the last few decades policy models at central banks have steadily shed any claims to being believable probability models of the data to which they are fit. Here we describe the current state of policy modeling, suggest some reasons why we have reached this state, and assess some promising directions for future progress.
    Date: 2006–05
  25. By: John Y. Campbell; Karine Serfaty-de Medeiros; Luis M. Viceira
    Abstract: This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.
    JEL: F3 F31 G11 G12 G15
    Date: 2007–05
  26. By: Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman
    Abstract: Two recent empirical studies of the 2001 recession published in the American Economic Review imply that an old-fashioned Keynesian fiscal stimulus—a cash transfer (“tax rebate”) or tax cut to households-- can overcome the zero interest-rate bound problem. We provide a quantitative estimate of the cash transfer that would achieve recovery from a severe recession when confronted with the zero bound. We obtain our result by adapting and simulating a macro-econometric model that has been recently econometrically estimated. With the interest rate near zero, a cash transfer equal to 3% of quarterly GDP repeated four times (quarterly) would reduce the unemployment rate nearly a full percentage point.
    Keywords: Recession, Fiscal Policy, Tax Rebate
    Date: 2006

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