Liquidity Traps, Learning and Stagnation

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 1341

Classification and Topics

• Classification: Wirtschaft ; Central Banks and Their Policies ; Monetary Policy ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Subject: Adaptive Learning ; Monetary Policy ; Fiscal Policy ; Zero Interest Rate Lower Bound ; Indeterminacy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Evans, George W. ; Guse, Eran ; Honkapohja, Seppo
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/17857
• Last update: 10.03.2025, 11:43 AM CET