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Deflationary Equilibrium with Uncertainty

Author

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  • Coyle, Philip
  • Maezono, Naoki
  • Nakata, Taisuke
  • Schmidt, Sebastian

Abstract

We analyze the so-called deflationary equilibrium of the New Keynesian model with an interest rate lower bound when the future course of the economy is uncertain. We find that, in the deflationary equilibrium, the rate of inflation is higher at the risky steady state - which takes uncertainty into account - than at the deterministic steady state - which abstracts from uncertainty. The rate of inflation at the risky steady state can be positive if the central bank's inflation target is positive. Our theory is consistent with the Japanese experience in the 2010s when the rate of inflation was on average positive while the interest rate lower bound was binding.

Suggested Citation

  • Coyle, Philip & Maezono, Naoki & Nakata, Taisuke & Schmidt, Sebastian, 2026. "Deflationary Equilibrium with Uncertainty," CEPR Discussion Papers 21159, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21159
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    File URL: https://cepr.org/publications/DP21159
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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