Economics, Econometrics and Finance
8 years ago

Fiscal policy struggles to combat zero interest rates during financial crises.

Credit Spreads and the Zero Bound on Interest Rates
Pedro Teles, Oreste Tristani, Fiorella De Fiore, Isabel Correia

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During financial crises, when interest rates hit rock bottom, it's hard for policymakers to make the best decisions. If credit spreads go up, they should lower interest rates, but they can't go below zero. Fiscal policies can help a bit, but they can't fully solve the problem without causing other issues. The zero lower bound is a bigger problem because of problems in financial markets, not because prices are stuck.