Exit Strategies

European Economic Review, Vol. 70, pp. 231-257

Ignazio Angeloni,
Ester Faia,
Roland C. Winkler
Research Area:
Macro and Finance
Jan 2014
exit strategies, debt consolidation, ?fiscal policy, ?fiscal multipliers, monetary policy, bank runs

We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate – based on output and inflation performance and bank stability – alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist, but are more nuanced.

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