Optimal robust monetary and fiscal policy under uncertainty on the lower bound

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Date

2024

Authors

Akbal, Gülserim Özcan
Traficante, Guido

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Elsevier

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Economics
(1997)
Founded in 1997, the Department of Economics is among the founding departments of our University. The Department offers two extensive undergraduate programs, either in English or in Turkish. Our undergraduate programs are catered to developing our students’ skills of analytical thinking, and to practical education. In this regard, the Social Sciences Research and Training Laboratory, founded under the guidance of our department, offers hands-on training to our own students, students and academicians from other universities, and public institutions. Our Department also offers a Graduate Degree Program in Applied Economy and a Doctorate Degree Program in Political Economy for graduates of undergraduate and graduate degree programs.

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Abstract

This paper studies robust policy when the policymaker has Knightian uncertainty about the exact position of the effective lower bound (ELB). First, we characterize optimal discretionary policy when a benevolent policymaker controls the nominal interest rate and the level of government spending. Compared to the full information case, an uncertainty -averse policymaker overestimates the level of the ELB, thereby triggering a more aggressive reduction in the nominal interest rate prior to the liquidity trap. Furthermore, the anticipation of a larger increase in public spending improves the trade-off between inflation and the output gap, and dampens the perceived worst -case level of the ELB. As a result, a less conservative fiscal stabilization is desirable to address the uncertainty concerns of the policymaker by partially substituting for the nominal interest rate at the ELB. Moreover, an inflation -conservative policymaker mitigates the impact of uncertainty on equilibrium outcomes even better than a fiscally active policymaker.

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Monetary policy, Fiscal policy, Discretion, Liquidity trap, Robust control, Knightian uncertainty

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0

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Q3

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81

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