The New-Keynesian Liquidity Trap
AbstractIn standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession prediction, and deflation and policy paradoxes are larger when prices are less sticky. I show that these puzzling predictions are artifacts of equilibrium selection. For the same interest-rate policy, different choices of multiple equilibria overturn all these results. A "local-to-frictionless" equilibrium, for the same interest rate policy, predicts mild inflation, no output reduction and negative multipliers during the liquidity trap, and its predictions approach the frictionless model smoothly.
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Date of creation: Sep 2013
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- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Fiscal Stimulus: Old Keynesian vs. New Keynesian
by paragwaknis in Musings of the Sorts on 2013-11-17 16:54:51
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