Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy

Taisuke Nakata and Sebastian Schmidt

No 2019-053, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. There is no straightforward recipe for enhancing welfare in this economy. Raising the inflation target or appointing an inflation-conservative central banker mitigates the inflation shortfall away from the lower bound but exacerbates deflationary pressures at the lower bound. Using government spending as an additional policy instrument worsens allocations at and away from the lower bound. 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)
Pages: 50 pages
Date: 2019-07-17
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.federalreserve.gov/econres/feds/files/2019053pap.pdf (application/pdf)

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 (2020)
Working Paper: Expectations-driven liquidity traps: implications for monetary and fiscal policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-53

DOI: 10.17016/FEDS.2019.053

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