Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy

Taisuke Nakata and Sebastian Schmidt

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 4, 68-103

Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policy-maker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.

JEL-codes: E31 E52 E61 E62 E63 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Expectations-driven liquidity traps: Implications for monetary and fiscal policy (2020)
Working Paper: Expectations-driven liquidity traps: implications for monetary and fiscal policy (2019)
Working Paper: Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy (2019)
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DOI: 10.1257/mac.20190228

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