Liquidity traps, learning and stagnation

George W Evans, Eran Guse, Seppo Honkapohja

    Research output: Contribution to journalArticlepeer-review

    58 Citations (Scopus)

    Abstract

    We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals. (c) 2008 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)1438-1463
    Number of pages26
    JournalEuropean Economic Review
    Volume52
    Issue number8
    Early online date7 Jun 2008
    DOIs
    Publication statusPublished - Nov 2008

    Keywords

    • Adaptive learning
    • Monetary policy
    • Fiscal policy
    • Zero interest rate lower bound
    • Indeterminacy
    • NOMINAL INTEREST-RATES
    • MONETARY-POLICY
    • FISCAL-POLICY
    • JAPAN
    • RULES
    • EXPECTATIONS
    • EQUILIBRIA

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