books

Exit Strategies

Source:
European Economic Review, Vol. 70, pp. 231-257
Year:
2014
Authors:
Ignazio Angeloni,
Ester Faia,
Roland C. Winkler
Reseach Area:
Macro Finance
Abstract:

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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