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Speed Limit Policy and Liquidity Traps

Taisuke Nakata, Sebastian Schmidt () and Paul Yoo
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Paul Yoo: UNC Kenan-Flagler Business School (E-mail: paul_yoo@kenan-flagler.unc.edu)

No 18-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) - policies aimed at stabilizing the output growth -less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.

Keywords: Liquidity Traps; Markov-Perfect Equilibrium; Speed Limit Policy; Zero Lower Bound (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Speed Limit Policy and Liquidity Traps (2020) Downloads
Working Paper: Speed limit policy and liquidity traps (2018) Downloads
Working Paper: Speed Limit Policy and Liquidity Traps (2018) Downloads
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