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Avoiding a self-fulfilling low-inflation trap

Author

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  • Schmidt, Sebastian

Abstract

A low-inflation trap is a situation where both actual and expected inflation are firmly below the central bank’s target and nominal interest rates are close to or at their lower bound. The concept is often used to characterise Japan’s quarter-century of very low, and often negative, inflation. More recently, persistent inflation shortfalls across the industrialised world have raised concerns that other jurisdictions, too, may be on the verge of getting caught in a Japanese-style low-inflation trap. Our new research shows how fiscal policy can help guard economies against this fate. JEL Classification: E52, E61, E62

Suggested Citation

  • Schmidt, Sebastian, 2021. "Avoiding a self-fulfilling low-inflation trap," Research Bulletin, European Central Bank, vol. 85.
    • Handle: RePEc:ecb:ecbrbu:2021:0085:
    Note: 2179645
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    More about this item

    Keywords

    effective lower bound; expectations; fiscal policy; Low inflation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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