Supply-Side Policies and the Zero Lower Bound
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.
We thank Mike Woodford for an important clarification and Jorge Juan, Jim Nason, and Ivan Werning for insightful comments. Beyond the usual disclaimer, we must note that any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the National Bureau of Economic Research. Finally, we also thank the NSF for financial support.
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