Lack of confidence, the zero lower bound, and the virtue of fiscal rules

Sebastian Schmidt

No 1795, Working Paper Series from European Central Bank

Abstract: In the presence of the zero lower bound, standard business cycle models with a Taylor-type monetary policy rule are prone to equilibrium multiplicity. A drop in confidence can drive the economy into a liquidity trap without any change in fundamentals. Using a prototypical sticky-price model, I show that Ricardian fiscal spending rules that prevent real marginal costs from declining in the face of a confidence shock insulate the economy from such expectations-driven liquidity traps. JEL Classification: E52, E62

Keywords: government spending; liquidity trap; Multiple Equilibria; Ricardian fiscal policy; sunspots (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-mon
Note: 2179645
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1795.en.pdf (application/pdf)

Related works:
Journal Article: Lack of confidence, the zero lower bound, and the virtue of fiscal rules (2016)
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:ecb:ecbwps:20151795

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().