Liquidity Traps: an Interest-rate-based Exit Strategy

Stephanie Schmitt-Grohe and Martín Uribe ()

Manchester School, 2014, vol. 82, issue S1, 1-14

Abstract: This paper proposes a strategy for escaping liquidity traps based on an augmented Taylor-type interest-rate feedback rule that differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate that reaches the intended target for this policy instrument in finite time. The proposed policy is designed to set a floor on inflationary expectations. Importantly, the effectiveness of the proposed exiting strategy does not rely on the existence of an accompanying fiscalist (or non-Ricardian) fiscal stance.

Date: 2014
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Working Paper: Liquidity Traps: An Interest-Rate-Based Exit Strategy (2010)
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