Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps

Ragna Alstadheim () and Dale Henderson

No 795, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We consider monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There may also be below-target equilibria (BTE) with inflation always below target and constant, asymptotically approaching or eventually reaching a below-target value, or oscillating. Liquidity traps are neither necessary nor sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary rules that preclude BTE when fiscal policy does not. Plausible fiscal policies preclude BTE for any monetary policy; those policies exclude surpluses and, possibly, balanced budgets.

Keywords: Interest rates; Prices; Monetary policy; Econometric models (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps (2006)
Working Paper: Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:795

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