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: E52 E58 E63 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (40)

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Related works:
Working Paper: Policy Interaction, Expectations and the Liquidity Trap (2004)
Working Paper: Policy interaction, expectations and the liquidity trap (2004)
Working Paper: Policy Interaction, Expectation and Liquidity Trap (2003)
Working Paper: Policy interaction, expectations, and the liquidity trap (2003)
Working Paper: Policy interaction, expectation and the liquidity trap (2003)
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DOI: 10.1016/j.red.2005.01.002

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