Monetary and fiscal policy in the aftermath of the Great Recession

Over five years after the start of the U.S. Great Recession, GDP remains below potential, employment is below its full level, and the federal funds rate is essentially zero. The Federal Reserve's policy rate is constrained at the zero lower bound (ZLB). Congress enacted policies to improve the economy, helping to grow the national debt to a size not seen since World War II. The first chapter examines the macroeconomic consequences of uncertainty surrounding the long-run goal for the national debt. I find that the recent uncertainty has slowed the current recovery and led to welfare losses, but these losses can be reversed if Congress clarifies its long-run goal. The second chapter presents global solutions to standard New Keynesian (NK) models with a ZLB. I provide the solution for all combinations of technology and discount factor shocks and a thorough explanation of how dynamics change across the state space. Capital accumulation permits intertemporal substitution, which strengthens the expectational effects near the ZLB. The third chapter examines determinacy in a standard NK model with a ZLB. Determinacy is not guaranteed even if the Taylor principle is satisfied when the ZLB does not bind. The boundary of the determinacy region imposes a clear tradeoff between the expected frequency and average duration of ZLB events. The fourth chapter develops the numerical foundations for the previous chapters. I demonstrate the accuracy, speed, and robustness of policy function iteration to solve models with regime-dependent parameters and binding constraints.