Exit strategies

- Model-based analysis of exit strategies from post-crisis policy accommodation.
- Banks subject to runs with endogenous determination of leverage and risk.
- Under a Taylor rule, the interest rate stays at the ZLB for several years.
- Announced and fast fiscal consolidations perform well based on output, inflation and bank stability.
- Under an alternative rule where the interest rate does not reach the ZLB, results are more nuanced.

We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate - based on output and inflation performance and bank stability - alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist but are more nuanced.