Faculty of Economics and Business Administration Publications Database

Exit Strategies

Angeloni, Ignazio
Winkler, Roland
Volume: 70
Pages: 231 - 257
Month: August
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2014
Keywords: Exit strategies; Debt consolidation; Fiscal policy; 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.