Policy Interaction, Expectations and the Liquidity Trap
Copyright policy )Policy Interaction, Expectations and the Liquidity Trap
Abstract We consider inflation and debt dynamics under a global interest rate rule when private agents forecast using adaptive learning. Given the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low-inflation steady state. Under learning the economy can slip below this low-inflation steady state and be driven to an even lower inflation floor supported by a switch to an aggressive money supply rule. Fiscal policy alone cannot push the economy out of this liquidity trap. Raising the inflation floor sufficiently can ensure a return to the target equilibrium.
- Aalto University Finland
- Centre for Economic Policy Research United Kingdom
- University of St Andrews United Kingdom
- University of Cambridge United Kingdom
- University of Oregon United States
Monetary economics, Credit, Macroeconomics, interest rate and money supply rules, Monetary policy, Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound, Indeterminacy, Monetary policy (Targets, and effects), fiscal and monetary policy, E58, Central, Bank loans, E52, Liquidity (Economics), Banks and banking, ddc:330, Public, stability of equilibria, Stabilization, Central banking, Inflation (Finance), Macroeconomic policy, stability of equilibria; fiscal and monetary policy; interest rate and money supply rules, Equilibrium (Economics), instruments, stability of equilibria, fiscal and monetary policy, interest rate and money supply rules, Comparative or joint analysis of fiscal and monetary policy, E63, Finance, jel: jel:E63, jel: jel:E52, jel: jel:E58
Monetary economics, Credit, Macroeconomics, interest rate and money supply rules, Monetary policy, Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound, Indeterminacy, Monetary policy (Targets, and effects), fiscal and monetary policy, E58, Central, Bank loans, E52, Liquidity (Economics), Banks and banking, ddc:330, Public, stability of equilibria, Stabilization, Central banking, Inflation (Finance), Macroeconomic policy, stability of equilibria; fiscal and monetary policy; interest rate and money supply rules, Equilibrium (Economics), instruments, stability of equilibria, fiscal and monetary policy, interest rate and money supply rules, Comparative or joint analysis of fiscal and monetary policy, E63, Finance, jel: jel:E63, jel: jel:E52, jel: jel:E58
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