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Supply-Side Policies and the Zero Lower Bound

Jesús Fernández-Villaverde, Pablo A. Guerrón-Quintana, Juan Rubio-Ramírez

NBER Working Paper No. 17543
Issued in October 2011
NBER Program(s):Economic Fluctuations and Growth

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

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Document Object Identifier (DOI): 10.3386/w17543

Published: IMF Economic Review (2014) 62, 248–260. doi:10.1057/imfer.2014.10; published online 15 July 2014 Supply-Side Policies and the Zero Lower Bound Jesús Fernández-Villaverde*, Pablo Guerrón-Quintana* and Juan F Rubio-Ramírez* citation courtesy of

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