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Fiscal activism and the zero nominal interest rate bound

I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policymaker who cares less about the stabilization of government spending relative to inflation and output gap stabilization than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policymaker uses government spending more aggressively to stabilize inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policymaker corrects for discretionary authorities’ disregard of the expectations channel, thereby reducing the welfare costs associated with zero bound events.