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Learning to Live in a Liquidity Trap

Jasmina Arifovic (), Stephanie Schmitt-Grohe () and Martín Uribe ()

No 23725, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank's ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation.

JEL-codes: E03 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2017-08
Note: EFG ME
References: View complete reference list from CitEc
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Published as Jasmina Arifovic & Stephanie Schmitt-Grohé & Martín Uribe, 2018. "Learning to Live in a Liquidity Trap," Journal of Economic Dynamics and Control, .

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