Department of Economics

TRANSFERS PLUS OPEN-MARKET PURCHASES: A REMEDY FOR RECESSION

Department of Economics

University of Delaware

Working Paper #2004-02

TRANSFERS PLUS OPEN-MARKET PURCHASES: A REMEDY FOR RECESSION

Laurence Seidman and Kenneth Lewis

This paper simulates the use of transfers to households plus central-bank open-market purchases to generate a recovery of a low-interest-rate economy from a negative demand shock. Transfers to households are automatically triggered in recession; the prescribed anti-recession transfer ratio is proportional to the unemployment gap. Three alternative complementary monetary policies that the Federal Reserve might decide to implement are considered: standard, moderate, and aggressive. The simulations suggest that transfers plus open market purchases are likely to be an effective remedy for such a recession while limiting potential adverse impacts on inflation and government debt held by the non-central-bank public.

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