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Conservatism and Liquidity Traps

Taisuke Nakata and Sebastian Schmidt ()

No 59, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.

Keywords: Deflationary Bias; Inflation Conservatism; Inflation Targeting; Liquidity Traps; Zero Lower Bound (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2014-10, Revised 2015-07
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Related works:
Working Paper: Conservatism and liquidity traps (2015) Downloads
Working Paper: Conservatism and Liquidity Traps (2014) Downloads
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