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Wealth Effects, the Taylor Rule and the Liquidity Trap

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  • Barbara Annicchiarico

    ()
    (University of Rome “Tor Vergata”)

  • Giancarlo Marini

    ()
    (University of Rome “Tor Vergata”)

  • Alessandro Piergallini

    ()
    (CeFiMS, University of London)

Abstract

This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, the operation of wealth effects does not avoid the occurrence of liquidity traps when the central bank implements a Taylor-type interest-rate feedback rule.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 103.

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Length: 32
Date of creation: 21 May 2007
Date of revision:
Handle: RePEc:rtv:ceisrp:103

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: Wealth Effects; Taylor Rules; Liquidity Traps.;

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 675-87, August.
  3. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1999. "Avoiding Liquidity Traps," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-21, C.V. Starr Center for Applied Economics, New York University.
  4. Peter Ireland, 2005. "The liquidity trap, the real balance effect, and the Friedman rule," Working Papers, Federal Reserve Bank of Boston 05-3, Federal Reserve Bank of Boston.
  5. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  7. McCallum, Bennett T., 2003. "Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(5), pages 1153-1175, July.
  8. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1999. "Monetary Policy and Multiple Equilibria," Departmental Working Papers, Rutgers University, Department of Economics 199914, Rutgers University, Department of Economics.
  9. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
  10. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, Elsevier, vol. 38(2), pages 183-198, March.
  11. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
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