Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154228
Authors: 
Schmidt, Sebastian
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1795
Abstract: 
In the presence of the zero lower bound, standard business cycle models with a Taylor-type monetary policy rule are prone to equilibrium multiplicity. A drop in confidence can drive the economy into a liquidity trap without any change in fundamentals. Using a prototypical sticky-price model, I show that Ricardian fiscal spending rules that prevent real marginal costs from declining in the face of a confidence shock insulate the economy from such expectations-driven liquidity traps.
Subjects: 
government spending
liquidity trap
multiple equilibria
Ricardian fiscal policy
sunspots
JEL: 
E52
E62
ISBN: 
978-92-899-1608-0
Document Type: 
Working Paper

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