Liquidity Traps and Jobless Recoveries

Stephanie Schmitt-Grohe and Martín Uribe ()

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 1, 165-204

Abstract: This paper proposes a model that explains the joint occurrence of liquidity traps and jobless growth recoveries. Its key elements are downward nominal wage rigidity, a Taylor-type interest rate feedback rule, the zero lower bound on nominal interest rates, and a confidence shock. Absent a change in policy, the model predicts that low inflation and high unemployment become chronic. With capital accumulation, the model predicts, in addition, an investment slump. The paper identifies a New Fisherian effect, whereby raising the nominal interest rate to its intended target for an extended period of time can boost inflationary expectations and thereby foster employment.

JEL-codes: E24 E31 E32 E43 E52 F44 G01 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20150220
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Citations: View citations in EconPapers (78)

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