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Neo-Fisherian Policies and Liquidity Traps

Florin Bilbiie

No 13334, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite.

Keywords: confidence and fundamental liquidity traps; Fiscal multipliers; forward guidance; monetary policy; neo-Fisherian; optimal policy (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 E6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2018-11
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