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α: calibrated so average coauthorship-adjusted count equals average raw count
We study the incidence and severity of periods with a binding effective lower bound on nominal interest rates and the efficacy of three types of state‐dependent policies—forward guidance about the path of future interest rates, large‐scale asset purchases, and spending‐based fiscal stimulus—in mitigating the detrimental consequences of the lower bound for macro‐economic stability. Based on the ECB's New Area‐Wide Model of the euro area, our findings suggest that, if left unaddressed, the lower bound can cause substantial macro‐economic distortions. In the near term, forward guidance, if fully credible, is most powerful and can largely undo these distortions. A combination of imperfectly credible forward guidance, asset purchases, and fiscal stimulus is almost equally effective, especially when asset purchases enhance the credibility of the forward‐guidance policy via a signaling effect. In the long run, with an equilibrium real rate as low as zero, a combination of all three policies is needed to materially reduce the distortions.