Escapist policy rules

James Bullard () and In-Koo Cho

No 2002-002, Working Papers from Federal Reserve Bank of St. Louis

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 in- flation. 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.

Keywords: Monetary policy; Inflation (Finance); Interest rates (search for similar items in EconPapers)
Date: Written 2003
View list of references View citations in EconPapers

Downloads: (external link)
http://research.stlouisfed.org/wp/2002/2002-002.pdf (application/pdf)

Related works:
Working Paper: Escapist Policy Rules (2003)
Journal Article: Escapist policy rules (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().