Escaping the Great Recession

We show that policy uncertainty about how the rising public debt will be stabilized empirically accounts for the lack of deation in the US economy during the zero-lower-bound period. Announcing \u85scal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning scal discipline, at the cost of increasing macroeconomic instability. This policy trade-o¤ can be resolved by committing to inating away only the portion of debt accumulated during the recession