Speed Limit Policy and Liquidity Traps

Taisuke Nakata, Sebastian Schmidt and Paul Yoo

No 2018-050, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)---policies aimed at stabilizing the output growth---less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.

Keywords: Liquidity traps; Markov-perfect equilibrium; Speed limit policy; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-07-19
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.federalreserve.gov/econres/feds/files/2018050pap.pdf (application/pdf)

Related works:
Working Paper: Speed Limit Policy and Liquidity Traps (2020)
Working Paper: Speed limit policy and liquidity traps (2018)
Working Paper: Speed Limit Policy and Liquidity Traps (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-50

DOI: 10.17016/FEDS.2018.050

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