Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212230 
Year of Publication: 
2012
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 27/2012
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However "fiscal switching rules" that automatically kick in without discretionary fine tuning can be equally effective.
Subjects: 
Adaptive Learning
Monetary Policy
Fiscal Policy
Zero Interest Rate Lower Bound
JEL: 
E63
E52
E58
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-818-1
Document Type: 
Working Paper

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