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Rare but Long-lasting Liquidity Traps and Fiscal Stimulus

Author

Listed:
  • Kevin XD Huang

    (Vanderbilt University)

  • Nam T Vu

    (Miami University of Ohio)

Abstract

A DSGE model with (i) state-dependent pricing and (ii) history-dependent monetary policy that compensates for lost opportunities of cutting the nominal interest rate due to a binding effective zero lower bound (ZLB) generates rare but long-lasting liquidity traps with endogenous transitions between the traps and normal times. Dynamic government spending multipliers (GSMs) are typically above unity in the liquidity traps but are uniformly below unity in normal times. Without (i) or (ii), the model generates only short-lived ZLB events while producing below-unity GSMs irrespective of the state of the economy.

Suggested Citation

  • Kevin XD Huang & Nam T Vu, 2019. "Rare but Long-lasting Liquidity Traps and Fiscal Stimulus," Vanderbilt University Department of Economics Working Papers 19-00014, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-sub-19-00016
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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