Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis

Mariana García-Schmidt and Michael Woodford

American Economic Review, 2019, vol. 109, issue 1, 86-120

Abstract: We argue that an influential "neo-Fisherian" analysis of the effects of low interest rates depends on using perfect foresight equilibrium analysis under circumstances where it is not plausible for people to hold expectations of that kind. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Perfect foresight is justified by our analysis as a reasonable approximation in some cases, but in the case of a commitment to maintain a low nominal interest rate for a long time, our reflective equilibrium implies neither neo-Fisherian conclusions nor implausibly strong predicted effects of forward guidance.

JEL-codes: D84 E12 E31 E43 E52 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20170110
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Citations: View citations in EconPapers (119)

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Related works:
Working Paper: Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis (2016)
Working Paper: Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis (2015)
Working Paper: Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis (2015)
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