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Neo-Fisherian Policies and Liquidity Traps

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  • Florin O. Bilbiie

Abstract

Liquidity traps can be either fundamental or confidence-driven. In a simple, unified New Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition allows neo-Fisherian effects (expansionary-inflationary interest rate increases), which are thus inherent in confidence traps. Several monetary and fiscal policies (forward guidance, interest rate increases, public spending, labor tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are also conflicting across trap varieties.

Suggested Citation

  • Florin O. Bilbiie, 2022. "Neo-Fisherian Policies and Liquidity Traps," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 378-403, October.
    • Handle: RePEc:aea:aejmac:v:14:y:2022:i:4:p:378-403
    DOI: 10.1257/mac.20200119
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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