Monetary Policy Switching in the Euro Area and Multiple Steady States: An Empirical Investigation

Gilles Dufrénot () and Guillaume A. Khayat

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Abstract: This paper investigates, in the case of the euro area, the standard assumption that the liquidity trap steady state, which arises from the existence of the zero lower bound on the nominal interest rate, is locally unstable. We show that the policy function of the European Central Bank (ECB) is described by a nonlinear Taylor rule. Then, using our estimations, we show that around the liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. Finally, we find that an inflation shock is more efficient than a demand shock to escape the liquidity trap steady state.

Keywords: Indeterminacy; multiple steady state equilibria; Euro Area; Monetary Policy; Multiple Steady States; Nonlinear Taylor Rules (search for similar items in EconPapers)
Date: 2017-07
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Published in Macroeconomic Dynamics, 2017, 21 (5), pp.1175--1188. ⟨10.1017/S1365100515000280⟩

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Journal Article: MONETARY POLICY SWITCHING IN THE EURO AREA AND MULTIPLE STEADY STATES: AN EMPIRICAL INVESTIGATION (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01590000

DOI: 10.1017/S1365100515000280

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