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A global analysis of liquidity effects, interest rate rules, and deflationary traps

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  • Noritaka Kudoh

    ()
    (Hokkaido University)

Abstract

The prevailing models of liquidity traps suggest that a deflationary trap is a stable steady state in a multiple equilibria model. These models implicitly assume that the central bank accelerates the process of disinflation by following a Taylor rule even though there is a long run positive relationship between the nominal interest rate and inflation rate. This paper presents a reduced-form model that integrates liquidity effects into the analysis of interest rate rules to generalize the previous results about uniqueness, determinacy, and dynamic property of the economy.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 1492-1498

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Handle: RePEc:ebl:ecbull:eb-09-00243

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Keywords: Taylor rules; liquidity effects; liquidity traps; deflation.;

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  1. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
  2. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "The perils of Taylor Rules," Departmental Working Papers 199831, Rutgers University, Department of Economics.
  3. Reichenstein, William, 1987. "The Impact of Money on Short-term Interest Rates," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 67-82, January.
  4. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
  5. Melvin, Michael, 1983. "The Vanishing Liquidity Effect of Money on Interest: Analysis and Implications for Policy," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 188-202, April.
  6. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," NBER Working Papers 3974, National Bureau of Economic Research, Inc.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  8. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
  9. Taylor, John-B, 2001. "Low Inflation, Deflation, and Policies for Future Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 35-51, February.
  10. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  11. Tomoyuki Nakajima, 2006. "Monetary policy with sticky prices and segmented markets," Economic Theory, Springer, vol. 27(1), pages 163-177, 01.
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