Role of expectations in a liquidity trap

Kohei Hasui, Yoshiyuki Nakazono and Yuki Teranishi

Journal of the Japanese and International Economies, 2019, vol. 52, issue C, 201-215

Abstract: A number of previous studies suggest that inflation expectations are important in considering the effectiveness of monetary policy in a liquidity trap. However, the role of inflation expectations can be very different, depending on the type of monetary policy that a central bank implements. This paper reveals how a private agent forms inflation expectation affects the effectiveness of monetary policy under the optimal commitment policy, the Taylor rule, and a simple rule with price-level targeting. We examine two expectation formations: (i) different degrees of anchoring, and (ii) different degrees of forward-lookingness. We show that how to form inflation expectations is less relevant when a central bank implements the optimal commitment policy, while it is critical when the central bank adopts the Taylor rule or a simple rule with price-level targeting. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations under rules other than the optimal commitment policy.

Keywords: Expectations; Liquidity trap; Monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Role of expectations in a liquidity trap (2019)
Working Paper: Role of Expectation in a Liquidity Trap (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:52:y:2019:i:c:p:201-215

DOI: 10.1016/j.jjie.2018.12.004

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