Rare but Long-lasting Liquidity Traps and Fiscal Stimulus

Kevin Huang () and Nam Vu

No 19-00014, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: A DSGE model with (i) state-dependent pricing and (ii) history-dependent monetary policy that compensates for lost opportunities of cutting the nominal interest rate due to a binding effective zero lower bound (ZLB) generates rare but long-lasting liquidity traps with endogenous transitions between the traps and normal times. Dynamic government spending multipliers (GSMs) are typically above unity in the liquidity traps but are uniformly below unity in normal times. Without (i) or (ii), the model generates only short-lived ZLB events while producing below-unity GSMs irrespective of the state of the economy.

Keywords: State-dependent pricing; history-dependent monetary policy; zero lower bound; fiscal stimulus; dynamic government spending multipliers (search for similar items in EconPapers)
JEL-codes: E0 E5 (search for similar items in EconPapers)
Date: 2019-12-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:vuecon-sub-19-00016

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