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Conservatism and Liquidity Traps

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  • Taisuke Nakata
  • Sebastian Schmidt

Abstract

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff's (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.Length: 48 pages

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  • Taisuke Nakata & Sebastian Schmidt, 2015. "Conservatism and Liquidity Traps," Working Papers e101, Tokyo Center for Economic Research.
  • Handle: RePEc:tcr:wpaper:e101
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    References listed on IDEAS

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    1. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    2. Gauti Eggertsson & Bulat Gafarov & Saroj Bhatarai, 2014. "Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing," 2014 Meeting Papers 1292, Society for Economic Dynamics.
    3. Burgert, Matthias & Schmidt, Sebastian, 2014. "Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 282-299.
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