Avoiding a self-fulfilling low-inflation trap

Sebastian Schmidt

Research Bulletin, 2021, vol. 85

Abstract: A low-inflation trap is a situation where both actual and expected inflation are firmly below the central bank’s target and nominal interest rates are close to or at their lower bound. The concept is often used to characterise Japan’s quarter-century of very low, and often negative, inflation. More recently, persistent inflation shortfalls across the industrialised world have raised concerns that other jurisdictions, too, may be on the verge of getting caught in a Japanese-style low-inflation trap. Our new research shows how fiscal policy can help guard economies against this fate. JEL Classification: E52, E61, E62

Keywords: effective lower bound; expectations; fiscal policy; Low inflation (search for similar items in EconPapers)
Date: 2021-06
Note: 2179645
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