Deflationary Equilibrium with Uncertainty

Philip Coyle, Naoki Maezono, Taisuke Nakata and Sebastian Schmidt

No 21159, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. We find that, in the deflationary equilibrium, the rate of inflation is higher at the risky steady state - which takes uncertainty into account - than at the deterministic steady state - which abstracts from uncertainty. The rate of inflation at the risky steady state can be positive if the central bank's inflation target is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding.

Keywords: Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Date: 2026-02
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