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Conservatism and Liquidity Traps

Taisuke Nakata and Sebastian Schmidt ()

No 2014-105, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.

Keywords: Discretion; inflation conservatism; inflation targeting; liquidity traps; zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ias, nep-mac and nep-mon
Date: 2014-11-12
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Related works:
Journal Article: Conservatism and liquidity traps (2019) Downloads
Working Paper: Conservatism and liquidity traps (2015) Downloads
Working Paper: Conservatism and Liquidity Traps (2015) Downloads
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