 Monetary and fiscal policy in a liquidity trap with inflation persistenceJournal of Economic Dynamics and Control, 2019, vol. 100, issue C, 1-28 Abstract: This paper relies on the new Keynesian model with structural inflation persistence to characterize the optimal monetary and fiscal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can be sufficient to avoid a depression. The central bank does not need to commit beyond the end of the crisis to get some traction on economic activity. Regarding fiscal policy, inflation persistence justifies some front-loading of government expenditures to get inflation started, such as to reduce the real interest rate. The magnitude of the optimal fiscal stimulus is decreasing in the degree of inflation persistence. Finally, if inflation persistence is due to adaptive expectations, rather than to price indexation, then monetary policy is ineffective while the optimal fiscal stimulus is large and heavily front-loaded. Keywords: Commitment; Inflation persistence; Liquidity trap; Monetary and fiscal policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:100:y:2019:i:c:p:1-28 DOI: 10.1016/j.jedc.2018.12.006 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.