Liquidity traps and expectation dynamics: Fiscal stimulus or fiscal austerity?
AbstractWe examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However “fiscal switching rules” that automatically kick in without discretionary fine tuning can be equally effective.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 27/2012.
Length: 33 pages
Date of creation: 09 Oct 2012
Date of revision:
adaptive learning; monetary policy; fiscal policy; zero interest rate lower bound;
Other versions of this item:
- Benhabib, Jess & Evans, George W. & Honkapohja, Seppo, 2012. "Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?," CEPR Discussion Papers 9176, C.E.P.R. Discussion Papers.
- Jess Benhabib & George W. Evans & Seppo Honkapohja, 2012. "Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?," NBER Working Papers 18114, National Bureau of Economic Research, Inc.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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"The perils of Taylor Rules,"
Departmental Working Papers
199831, Rutgers University, Department of Economics.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Is it time for the Fed to raise its policy rate?
by David Andolfatto in MacroMania on 2013-01-20 02:18:00
- Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
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