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Conservatism and liquidity traps

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  • Nakata, Taisuke
  • Schmidt, Sebastian

Abstract

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.

Suggested Citation

  • Nakata, Taisuke & Schmidt, Sebastian, 2019. "Conservatism and liquidity traps," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 37-47.
  • Handle: RePEc:eee:moneco:v:104:y:2019:i:c:p:37-47
    DOI: 10.1016/j.jmoneco.2018.09.005
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    More about this item

    Keywords

    Deflationary bias; Inflation conservatism; Inflation targeting; Liquidity traps; Zero lower bound;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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