Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps

Ragna Alstadheim () and Dale Henderson

No 2006/03, Working Paper from Norges Bank

Abstract: We consider standard monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There are also below-target equilibria (BTE) with inflation always below target and constant asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary or sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE, some which are monotonic in inflation but all of which are non-differentiable at a point. For standard monetary-policy rules, there are plausible fiscal policies that insure uniqueness by precluding BTE; those policies exclude perpetual surpluses and, possibly, perpetual balanced budgets.

Keywords: Zero bound; liquidity trap; inflation targeting; determinancy (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 E62 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2006-04-18
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps (2006)
Working Paper: Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2006_03

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