I will conclude with some thoughts about the transition back toward more typical monetary policy as the economy and financial markets improve.1 Fiscal policy when monetary policy is at the zero lower bound During normal economic circumstances, most economists do not view expansionary fiscal policy as an especially effective tool for producing a sustained increase in aggregate demand and in resource utilization.
Ordinarily, financial market participants would expect monetary policy to react by increasing the target federal funds rate over time to keep output near potential and inflation near its desired level. Thus, the enactment of a sustained fiscal expansion would trigger an increase in expected short-term interest rates and hence longterm interest rates.