EconPapers    
Economics at your fingertips  
 

Policy Interaction, Expectations and the Liquidity Trap

George Evans () and Seppo Honkapohja ()

Review of Economic Dynamics, 2005, vol. 8, issue 2, 303-323

Abstract: We consider inflation and debt dynamics under a global interest rate rule when private agents forecast using adaptive learning. Given the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low-inflation steady state. Under learning the economy can slip below this low-inflation steady state and be driven to an even lower inflation floor supported by a switch to an aggressive money supply rule. Fiscal policy alone cannot push the economy out of this liquidity trap. Raising the inflation floor sufficiently can ensure a return to the target equilibrium. (Copyright: Elsevier)

Keywords: Adaptive Learning; Monetary Policy; Fiscal Policy; Zero Interest Rate Lower Bound; Indeterminacy (search for similar items in EconPapers)
JEL-codes: E63 E52 E58 (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27) Track citations by RSS feed

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2005.01.002 Full text (application/pdf)
Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

Related works:
Working Paper: Policy Interaction, Expectations and the Liquidity Trap (2004) Downloads
Working Paper: Policy interaction, expectations and the liquidity trap (2004) Downloads
Working Paper: Policy interaction, expectation and the liquidity trap (2003) Downloads
Working Paper: Policy Interaction, Expectation and Liquidity Trap (2003) Downloads
Working Paper: Policy interaction, expectations, and the liquidity trap (2003) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:v:8:y:2005:i:2:p:303-323

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2005.01.002

Access Statistics for this article

Review of Economic Dynamics is currently edited by Jonathan Heathcote and Vincenzo Quadrini

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2019-12-02
Handle: RePEc:red:issued:v:8:y:2005:i:2:p:303-323