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Title:Liquidity Traps, Learning and Stagnation PDF Logo
Authors:Evans, George W.
Guse, Eran
Honkapohja, Seppo
Issue Date:2007
Series/Report no.:Kieler Arbeitspapiere 1341
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.
Subjects:Adaptive Learning
Monetary Policy
Fiscal Policy
Zero Interest Rate Lower Bound
Indeterminacy
JEL:E58
E52
E63
Document Type:Working Paper
Appears in Collections:Kieler Arbeitspapiere, IfW
Publikationen von Forscherinnen und Forschern des IfW

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