Tuesday, 2 June 2015

2015-038: Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis

Otmane El Rhazi, Taisuke Nakata. This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax instrument and the initial debt level. Full Text

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