Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94330
Authors: 
Benhabib, Jess
Schmitt-Grohe, Stephanie
Uribe, Martin
Year of Publication: 
2000
Series/Report no.: 
Working Papers, Department of Economics, Rutgers, The State University of New Jersey 1999-25
Abstract: 
Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps, as monetary policy is ineffective in bringing about the government's goals regarding the stability of output and prices. This paper proposes several fiscal and monetary policies that preserve the appealing features of Taylor rules, such as local uniqueness of equilibrium near the inflation target, and at the same time rule out the deflationary expectations that can lead an economy into a liquidity trap.
Document Type: 
Working Paper

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