Economics, Econometrics and Finance
4 years ago

Fiscal policy key to overcoming zero interest rate constraint during crises.

RePEc: Research Papers in Economics
Credit Spreads and the Zero Bound on Interest Rates
Pedro Teles, Oreste Tristani, Fiorella De Fiore, Isabel Correia

Paper Summary

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During financial crises, when interest rates hit rock bottom, it limits the effectiveness of monetary policy. Negative interest rates would be ideal to counter rising credit spreads, but they can't happen due to this constraint. Fiscal policy can help somewhat, but it can't fully solve the problem without extra costs. The zero lower bound is a bigger issue because of problems in financial markets, not just price rigidities.