Liquidity Traps: An Interest-Rate-Based Exit Strategy
This paper analyzes a potential strategy for escaping liquidity traps. The strategy is based on an augmented Taylor-type interest-rate feedback rule and differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate. This path reaches the intended target for this policy instrument in finite time. The policy we study is designed to raise inflationary expectations over time while at the same time maintaining all of the desirable local properties of the Taylor principle in a neighborhood of the intended inflation target. Importantly, the effectiveness of the potential exit strategy studied in this paper does not rely on the existence of an accompanying fiscalist (or non-Ricardian) fiscal stance.
|Date of creation:||Nov 2010|
|Publication status:||published as Stephanie Schmitt-Grohé & Martín Uribe, 2014. "Liquidity Traps: an Interest-rate-based Exit Strategy," The Manchester School, vol 82, pages 1-14.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Uribe, Martin, 1999. "Comparing the welfare costs and initial dynamics of alternative inflation stabilization policies," Journal of Development Economics, Elsevier, vol. 59(2), pages 295-318, August.
- Bullard, James B., 2013. "Seven Faces of "The Peril"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 613-628.