Resource title

Liquidity Traps, Learning and Stagnation

Resource image

image for OpenScout resource :: Liquidity Traps, Learning and Stagnation

Resource description

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.

Resource author

George W. Evans, Eran Guse, Seppo Honkapohja

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/17857

Resource license

Adapt according to the presented license agreement and reference the original author.