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Deflationary Equilibrium with Uncertainty

Author

Listed:
  • Philip Coyle

    (University of Wisconsin-Madison, Department of Economics (Email: pcoyle@wisc.edu))

  • Naoki Maezono

    (Graduate School of Public Policy, University of Tokyo (Email: m7046ranpo464@g.ecc.u-tokyo.ac.jp))

  • Taisuke Nakata

    (Faculty of Economics and Graduate School of Public Policy, University of Tokyo (Email: taisuke.nakata@e.u-tokyo.ac.jp))

  • Sebastian Schmidt

    (European Central Bank, Monetary Policy Research Division, (Email: sebas-tian.schmidt@ecb.int))

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. In the deflationary equilibrium, we find that the rate of inflation is higher at the risky steady state-which takes uncertainty into account-than at the deterministic steady state- which abstracts away from uncertainty. The rate of inflation at the risky steady state can be positive if the target rate set by the central bank 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

  • Philip Coyle & Naoki Maezono & Taisuke Nakata & Sebastian Schmidt, 2025. "Deflationary Equilibrium with Uncertainty," IMES Discussion Paper Series 25-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:25-e-01
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    More about this item

    Keywords

    Effective Lower Bound; Deflationary Equilibrium; Liquidity Trap; Risky Steady State; Uncertainty;
    All these keywords.

    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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