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    Monetary and fiscal policies near the zero lower bound

    Harrison, Richard John (2020) Monetary and fiscal policies near the zero lower bound. Doctoral thesis, Birkbeck, University of London.

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    This thesis contributes to the ongoing debate on the conduct of monetary and fiscal policies near the lower bound on the policy rate. Chapter 1 studies optimal monetary policy in a model with portfolio adjustment costs. Central bank purchases of long-term debt (quantitative easing; `QE') influence the average portfolio return and hence aggregate demand and inflation. It is optimal to adopt QE rapidly with large scale asset purchases triggered when the policy rate hits the lower bound, consistent with observed policy responses to the Global Financial Crisis. Optimal exit is gradual. Chapter 2 examines the effects of money-financed fiscal transfers at the lower bound. It is assumed that money may earn interest so that money-financed transfers at the lower bound are feasible, while the short-term policy rate is used to stabilize the economy in normal times. A simple financial friction generates a wealth effect on household spending from government liabilities. This encourages households to spend rather than save a transfer from the government. While temporary money-financed transfers to households can stimulate spending and inflation at the lower bound, similar effects could be achieved by bond-financed tax cuts. Chapter 3 explores optimal monetary policy in a model with long-term government debt and 'active' fiscal policy. This means that stabilization of government debt is a binding constraint on monetary policy. Away from the lower bound, policy cannot fully offset the effects of shocks to the natural rate of interest, reducing welfare. At the lower bound, recessionary shocks increase debt and generate the anticipation that in inflation will be higher in future, to stabilize the real value of debt. This mechanism mitigates the effects of recessionary shocks. For sufficiently long debt duration, improved performance at the lower bound may outweigh welfare losses in normal times.


    Item Type: Thesis
    Copyright Holders: The copyright of this thesis rests with the author, who asserts his/her right to be known as such according to the Copyright Designs and Patents Act 1988. No dealing with the thesis contrary to the copyright or moral rights of the author is permitted.
    Depositing User: Acquisitions And Metadata
    Date Deposited: 13 Jul 2020 17:47
    Last Modified: 02 Aug 2023 18:03


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