Unoriginal, but simple, true, important, and neglected

Jesús Fernández-Villaverde, Pablo Guerrón-Quintanaz, and Juan F. Rubio-Ramírez report:

This paper examines how supply-side policies may play a role in fi…ghting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fi…scal policies.

Yes, there exists a model where the productivity shock has negative consequences, but don’t let “them” talk you into believing that model is relevant for today’s world.


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