We reconsider several monetary and fiscal policies that have been proposed as tools of stabilization policy when conventional interest-rate policy is constrained by the zero lower bound on interest rates, assuming that households and firms are capable of explicit forward planning over only a limited horizon. The predicted effects of all of the policies are somewhat different than under rational expectations, but credible announcements about future policy can still influence behavior, and there is, if anything, an even stronger case for pursuing systematic policies outside crisis periods in order to shape expectations during a crisis.
Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight
