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Inflation targets and the liquidity trap

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Author Info
Matt Klaeffling (University of Bonn - Center for European Integration Studies (ZEI), Regina-Pacis-Weg 3, Postfach 2220, D-53012 Bonn, Germany.)
Victor Lopez Perez () (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
Abstract

The presence of a lower bound of zero on nominal interest rates has important implications for the conduct of optimal monetary policy. Standard rational expectations models can have alternative steady states as well as non-unique laws of motion, i.e. there can be possible sunspot equilibria. Such complications can be ruled out under a number of alternative assumptions. In this paper we analyse the relevance of the zero lower bound for alternative levels of inßation in a standard Neo-Keynesian model, where stability is assured by assuming that fiscal policy turns expansionary at the zero lower bound. JEL Classification: E31; E52; E58; E61.

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Paper provided by European Central Bank in its series Working Paper Series with number 272.

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Length: 48 pages
Date of creation: Sep 2003
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Handle: RePEc:ecb:ecbwps:20030272

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Related research
Keywords: Interest rate rules; inflation targets; zero bound on nominal interest rates; non-linear models; rational expectations.;

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June. [Downloadable!]
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