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Expectations, Deflation Traps and Macroeconomic Policy

George Evans () and Seppo Honkapohja ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks pushing interest rates to the zero lower bound, temporary increases in government spending can be used to insulate the economy from deflation traps.

Keywords: Adaptive Learning; Monetary Policy; Fiscal Policy; Zero Interest Rate Lower Bound (search for similar items in EconPapers)
JEL-codes: E63 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2010-07-06
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Working Paper: Expectations, deflation traps and macroeconomic policy (2009) Downloads
Working Paper: Expectations, Deflation Traps and Macroeconomic Policy (2009) Downloads
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