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Some unpleasant properties of log-linearized solutions when the nominal rate is zero


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  • R. Anton Braun
  • Lena Mareen Körber
  • Yuichiro Waki


Does fiscal policy have qualitatively different effects on the economy in a liquidity trap? We analyze a nonlinear stochastic New Keynesian model and compare the true and loglinearized equilibria. Using the loglinearized equilibrium conditions, the answer to the above question is yes. However, for the true nonlinear model, the answer is no. For a broad range of empirically relevant parameterizations, labor falls in response to a tax cut in the loglinearized economy but rises in the true economy. While the government purchase multiplier is above two in the loglinearized economy it is about one in the true economy.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2012-05.

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Date of creation: 2012
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Handle: RePEc:fip:fedawp:2012-05

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As found by, the blog aggregator for Economics research:
  1. Eggertsson/Woodford and Forward Guidance
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2012-09-14 16:10:00
  2. To log-linearize or not to log-linearize?
    by Economic Logician in Economic Logic on 2012-10-22 15:00:00
  3. Something I have Always Believed
    by RB in The Lumpy Economist on 2012-10-24 01:22:48
  4. 10 Mid-Week PM Reads
    by Barry Ritholtz in The Big Picture on 2012-10-24 20:30:21
  5. Krugman on Taylor
    by David Andolfatto in MacroMania on 2013-03-19 19:12:00
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