Learning to live in a liquidity trap
Stephanie Schmitt-Grohe () and
Martín Uribe ()
Journal of Economic Dynamics and Control, 2018, vol. 89, issue C, 120-136
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)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Learning to Live in a Liquidity Trap (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:89:y:2018:i:c:p:120-136
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
Bibliographic data for series maintained by Dana Niculescu ().