Unconventional Policies in State-Contingent Liquidity Traps

William Tayler and Roy Zilberman

No 400233890, Working Papers from Lancaster University Management School, Economics Department

Abstract: We characterize optimal unconventional monetary and fiscal-financial policies within a tractable New Keynesian model featuring a monetary policy cost channel. State-dependent deposit tax-subsidy interventions remove the zero lower bound constraint on the nominal interest rate, thereby minimizing output and price fluctuations following both supply-driven and demand-driven liquidity traps. Specifically, deposit subsidies circumvent the inflation-output trade-off arising from stagflationary shocks by enabling the implementation of negative nominal interest rates. Moreover, deposit taxes facilitate modest interest rate hikes to escape deflationary traps. Notably, discretionary and commitment policies with deposit taxes / subsidies deliver virtually equivalent welfare gains, rendering time-inconsistent forward guidance schedules unnecessary.

Keywords: deposit tax-subsidy; cost channel; optimal policy; discretion vs. commitment; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 E63 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Unconventional Policies in State-Contingent Liquidity Traps (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:400233890

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