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A NOTE ON THE SLOPE OF THE AGGREGATE DEMAND CURVE AT THE ZERO LOWER BOUND

Published online by Cambridge University Press:  24 September 2020

Yangyang Ji  and
Wei Xiao
Yangyang Ji*
Affiliation:
Central University of Finance and Economics
Wei Xiao
Affiliation:
State University of New York at Binghamton
*
Address correspondence to: Yangyang Ji, China Economics and Management Academy, Central University of Finance and Economics, No. 39, South College Road, Haidian District, 100081Beijing, China. e-mail: yji3@binghamton.edu.
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Abstract

This paper analyzes a regime-switching New Keynesian model to understand what happens to the aggregate economy when the nominal interest rate hits the zero lower bound (ZLB). Contrary to the literature, our model predicts that the aggregate demand curve is not always upward sloping when the ZLB binds. Instead, it depends on expectations. If the expected duration of the ZLB is short but consistent with expectations surveys, the AD curve can be downward sloping. In that case, the fiscal multiplier is moderate and supply-side reforms are expansionary. These results complement existing findings in the literature.

Keywords

New Keynesian ModelZero Lower BoundFiscal MultipliersSupply-Side Reforms
Type
Notes
Information
Macroeconomic Dynamics , Volume 26 , Issue 4 , June 2022 , pp. 1107 - 1126
Copyright
© 2020 Cambridge University Press

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