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.
Keywords
exit strategies, debt consolidation, fiscal policy, fiscal multipliers, monetary policy, bank runs
Topic
Systematic Risk Stability and Regulation Fiscal Stability
Relations
Research Data
JEL Classification
Research Area
Topic
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