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
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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.

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