Expectations-driven liquidity traps: Implications for monetary and fiscal policy

Sebastian Schmidt and Taisuke Nakata

No 15422, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely-studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.

Keywords: Effective lower bound; Sunspot equilibria; Monetary policy; Fiscal policy; Discretion; Policy delegation (search for similar items in EconPapers)
JEL-codes: E52 E61 E62 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy (2022)
Working Paper: Expectations-driven liquidity traps: implications for monetary and fiscal policy (2019)
Working Paper: Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy (2019)
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