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Learning to live in a liquidity trap

Jasmina Arifovic, Stephanie Schmitt-Grohe () and Martín Uribe ()

Journal of Economic Dynamics and Control, 2018, vol. 89, issue C, 120-136

Abstract: The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank’s ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation.

Keywords: Liquidity trap; Social learning; Monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 E70 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Learning to Live in a Liquidity Trap (2017) Downloads
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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