Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight

Yinxi Xie & Michael Woodford
"We consider the effectiveness of stabilization policy when the zero lower bound (ZLB) is a relevant constraint on conventional monetary policy by relaxing the assumption of rational expectations. In particular, we assume bounded rationality in terms of limited foresight—people can plan for only a finite distance into the future when they deductively reason about the economy's future evolution. We examine how the degree of foresight affects the outcomes of fiscal and monetary stabilization policy. We...
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