EconPapers    
Economics at your fingertips  
 

Inflation Targeting and Liquidity Traps Under Endogenous Credibility

Cars Hommes and Joep Lustenhouwer

Staff Working Papers from Bank of Canada

Abstract: Policy implications are derived for an inflation-targeting central bank, whose credibility is endogenous and depends on its past ability to achieve its targets. This is done in a New Keynesian framework with heterogeneous and boundedly rational expectations. We find that the region of allowed policy parameters is strictly larger than under rational expectations. However, when the zero lower bound on the nominal interest rate is accounted for, self-fulfilling deflationary spirals can occur, depending on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target and aggressive monetary easing.

Keywords: Business fluctuations and cycles; Credibility; Monetary policy (search for similar items in EconPapers)
JEL-codes: C62 E32 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

Downloads: (external link)
https://www.bankofcanada.ca/2019/02/staff-working-paper-2019-9/ Abstract (text/html)
https://www.bankofcanada.ca/wp-content/uploads/2019/02/swp2019-9.pdf Full text (application/pdf)

Related works:
Journal Article: Inflation targeting and liquidity traps under endogenous credibility (2019) Downloads
Working Paper: Inflation Targeting and Liquidity Traps under Endogenous Credibility (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-9

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-31
Handle: RePEc:bca:bocawp:19-9