The New-Keynesian Liquidity Trap

John Cochrane

No 19476, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices become less sticky. I show that both sets of predictions are strongly affected by equilibrium selection. For the same interest-rate path, different choices of equilibria - either by the researcher's direct selection or the researcher's specification of expected Federal Reserve policy - can overturn all these results. A set of "local-to-frictionless" equilibria predicts mild inflation, no output reduction and negative multipliers during the liquidity trap, and its predictions approach the frictionless model smoothly, all for the same interest rate path.

JEL-codes: E12 E3 E4 E6 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-mac
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as John H. Cochrane, 2017. "The new-Keynesian liquidity trap," Journal of Monetary Economics, vol 92, pages 47-63.

Downloads: (external link)
http://www.nber.org/papers/w19476.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:19476

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w19476

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().