Essays on optimal monetary and fiscal policy

This thesis is a contribution to the study of the biggest challenge in monetary-policy making in the last two or three decades: the ineffectiveness of monetary policy to achieve positive stimulus of aggregate demand in the environment of extremely low interest rates – the, so called, zero lower bound problem. The dissertation consists of three related papers, each of which employs a computational general equilibrium model of the kind frequently used in New Keynesian literature to study the optimal design of monetary and fiscal policy in the absence of commitment and in the presence of an occasionally binding zero lower bound on the nominal interest rate. The central question of the thesis, and the unifying theme across the three papers, is how a benevolent policy maker who controls both fiscal and monetary authority should respond to a sudden fall in aggregate demand so large that the conventional, textbook-like response of reducing the central bank’s policy rate is not sufficient to restore effective demand. [...]