Deflationary Equilibrium with Uncertainty

Philip Coyle, Naoki Maezono, Taisuke Nakata and Sebastian Schmidt
Additional contact information
Philip Coyle: University of Wisconsin-Madison, Department of Economics (Email: pcoyle@wisc.edu)
Naoki Maezono: Graduate School of Public Policy, University of Tokyo (Email: m7046ranpo464@g.ecc.u-tokyo.ac.jp)
Taisuke Nakata: Faculty of Economics and Graduate School of Public Policy, University of Tokyo (Email: taisuke.nakata@e.u-tokyo.ac.jp)
Sebastian Schmidt: European Central Bank, Monetary Policy Research Division, (Email: sebas-tian.schmidt@ecb.int)

No 25-E-01, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. In the deflationary equilibrium, we find that the rate of inflation is higher at the risky steady state-which takes uncertainty into account-than at the deterministic steady state- which abstracts away from uncertainty. The rate of inflation at the risky steady state can be positive if the target rate set by the central bank is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding.

Keywords: Effective Lower Bound; Deflationary Equilibrium; Liquidity Trap; Risky Steady State; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Date: 2025-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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