Unconventional policies in state-dependent liquidity traps

William J. Tayler and Roy Zilberman

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

Abstract: We characterize optimal unconventional monetary and fiscal-financial policies against supply- and demand-driven liquidity traps within a tractable New Keynesian model featuring a cash-in-advance constraint and a monetary policy cost channel. Deposit subsidies circumvent the inflation-output trade-off arising from stagflationary shocks and supply-driven liquidity traps by enabling negative nominal interest rates. Additionally, deposit taxes facilitate modest interest rate hikes to escape demand-driven deflationary traps. Notably, discretionary and commitment policies with deposit taxes / subsidies deliver virtually equivalent welfare gains, rendering time-inconsistent forward guidance schedules unnecessary. We also derive robust and implementable optimal policy rules when the sources of shocks are unknown.

Keywords: Deposit tax-subsidy; Cost channel; Optimal policy; Discretion vs. commitment; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E63 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001489

DOI: 10.1016/j.jedc.2024.104956

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