IDEAS home Printed from
   My bibliography  Save this paper

Discussion of Evans and Honkapohja, \"Policy interaction, expectations, and the liquidity trap\"



The result of Benhabib, Schmitt-Groh, and Uribe (2001) is powerful because it relies only on three rather natural conditions: the Fisher equation, the convex Taylor rule, and the lower bound of the nominal interest rate. Their result is striking because the paper reveals the peril of the active Taylor rule, which has been shown to implement the target in a stable manner under various conditions. In a related paper, Benhabib, Schmitt-Groh, and Uribe (2002) proposed a number of policies designed to avoid the liquidity trap outcome. One is to link government's spending to the inflation rate. Subject to the intertemporal budget constraint, the government's taxation on the private sector decreases as the inflation rate drops, causing the budget of the private sector to increase. Consequent increases in aggregate demand and the price level push the economy away from the liquidity trap. This sort of fiscal policy is considered \"active\" in the sense that the policy can increase the government budget deficit, in contrast to the \"passive\" fiscal policy which is designed to maintain or lower the budget deficit.

Suggested Citation

  • In-Koo Cho, 2003. "Discussion of Evans and Honkapohja, \"Policy interaction, expectations, and the liquidity trap\"," FRB Atlanta Working Paper 2003-17, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2003-17

    Download full text from publisher

    File URL:
    Download Restriction: no


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2003-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.