Expectations-driven liquidity traps: Implications for monetary and fiscal policy
By: Nakata, Taisuke and Schmidt, Sebastian
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Material type: 
BookPublisher: American Economic Journal: Macroeconomics Description: 14(4), Oct, 2022: p.68-103.
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American Economic Journal: MacroeconomicsSummary: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policy-maker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
| Item type | Current location | Call number | Vol info | Status | Date due | Barcode |
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Articles
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Indian Institute of Public Administration | 14(4), Oct, 2022: p.68-103 | Available | AR127555 |
We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policy-maker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
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