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Monetary Policy Switching in the Euro Area and Multiple Steady States: An Empirical Investigation

Author

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  • Gilles Dufrénot

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Guillaume A. Khayat

Abstract

This paper investigates, in the case of the euro area, the standard assumption that the liquidity trap steady state, which arises from the existence of the zero lower bound on the nominal interest rate, is locally unstable. We show that the policy function of the European Central Bank (ECB) is described by a nonlinear Taylor rule. Then, using our estimations, we show that around the liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. Finally, we find that an inflation shock is more efficient than a demand shock to escape the liquidity trap steady state.

Suggested Citation

  • Gilles Dufrénot & Guillaume A. Khayat, 2017. "Monetary Policy Switching in the Euro Area and Multiple Steady States: An Empirical Investigation," Post-Print hal-01590000, HAL.
    • Handle: RePEc:hal:journl:hal-01590000
    DOI: 10.1017/S1365100515000280
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