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Supply-Side Policies and the Zero Lower Bound

Author

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

Abstract

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.

Suggested Citation

  • Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Juan Rubio-Ramírez, 2011. "Supply-Side Policies and the Zero Lower Bound," NBER Working Papers 17543, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17543
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    Cited by:

    1. Mitsuru Katagiri, 2016. "Coordination in Price Setting and the Zero Lower Bound: A Global Games Approach," Bank of Japan Working Paper Series 16-E-12, Bank of Japan.
    2. Thorsten Drautzburg & Harald Uhlig, 2015. "Fiscal Stimulus and Distortionary Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 894-920, October.
    3. Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.
    4. Bianchi, Francesco & Melosi, Leonardo, 2019. "The dire effects of the lack of monetary and fiscal coordination," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 1-22.
    5. Francesco Bianchi & Leonardo Melosi, 2017. "Escaping the Great Recession," American Economic Review, American Economic Association, vol. 107(4), pages 1030-1058, April.
    6. Matteo Cacciatore & Giuseppe Fiori, 2016. "The Macroeconomic Effects of Goods and Labor Marlet Deregulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 1-24, April.
    7. Crafts, Nicholas, 2013. "Long-Term Growth in Europe: What Difference does the Crisis Make?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 224, pages 14-28, May.
    8. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
    9. Davide Porcellacchia, 2016. "Wage-Price Dynamics and Structural Reforms in Japan," IMF Working Papers 2016/020, International Monetary Fund.
    10. Yangyang Ji, 2019. "Are Supply-side Reforms Contractionary at the Zero Lower Bound?," CESifo Economic Studies, CESifo Group, vol. 65(1), pages 68-83.
    11. Sofía Bauducco & Rodrigo Caputo, 2013. "Wicksell Versus Taylor: A Quest for Determinancy and the (IR) Relevance of the Taylor Principle," Working Papers Central Bank of Chile 705, Central Bank of Chile.
    12. Narayana Kocherlakota, 2014. "Comment on "Quantifying the Lasting Harm to the US Economy from the Financial Crisis"," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29, pages 146-152, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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