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Inflation Targets and the Liquidity Trap

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  • Matt Klaeffling
  • Víctor López Pérez

Abstract

The presence of a lower bound of zero on nominal interest rate has important implications for the conduct of optimal monetary policy. Standard rational expectations models can have alternative steady states as well as non-unique laws of motion, i.e. there can be possible sunspot equilibria. Such complications can be ruled out under a number of alternative assumptions. In this paper we analyse the relevance of the zero lower bound for alternative levels of inflation in a standard Neo-Keynesian model, where stability is assured by assuming that fiscal policy turns expansionary at the zero lower bound.

Suggested Citation

  • Matt Klaeffling & Víctor López Pérez, 2003. "Inflation Targets and the Liquidity Trap," Working Papers wp2003_0309, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2003_0309
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    1. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    2. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    3. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.

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