Optimal Fiscal-Monetary Policy Mix at the Zero Lower Bound in the Euro Area

Abstract

This master thesis presents the main intuitions related to the optimal monetary policy and optimal fiscal-monetary policy mix literature, considering the zero lower bound on the nominal interest rate, through three main branches: the stabilization trade-off between prices and output gap, the history-dependent policy, and the counter-cyclical policy. The main results are, at the zero lower bound, firstly, an optimal monetary policy should commit to a history-dependent policy in order to stimulate the aggregate demand and reduce the deflation expectations, secondly, combining the monetary and fiscal history-dependent policy allows to create an inflationary and output boom, thirdly, a counter-cyclical fiscal policy regarding the government spending is effective. The thesis ends with an application to the case of the euro area, mainly through the analysis of the various crisis over the past fourteen years, and presents one personal economic avenue for improving the policy mix in the euro area: the implementation of an optimal forward-guidance policy mix.