Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25427
Authors: 
Bullard, James
Cho, In-Koo
Year of Publication: 
2003
Series/Report no.: 
CFS Working Paper 2003/38
Abstract: 
We study a simple, microfounded macroeconomic system in which the monetary authority employs a Taylor-type policy rule. We analyze situations in which the self-confirming equilibrium is unique and learnable according to Bullard and Mitra (2002). We explore the prospects for the use of 'large deviation' theory in this context, as employed by Sargent (1999) and Cho, Williams, and Sargent (2002). We show that our system can sometimes depart from the self-confirming equilibrium towards a non-equilibrium outcome characterized by persistently low nominal interest rates and persistently low inflation. Thus we generate events that have some of the properties of 'liquidity traps' observed in the data, even though the policymaker remains committed to a Taylor-type policy rule which otherwise has desirable stabilization properties.
Subjects: 
Learning
monetary policy rules
escape dynamics
JEL: 
E52
E32
D83
D84
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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