Discussion Paper Details

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Title: Neo-Fisherian Policies and Liquidity Traps

Author(s): Florin Ovidiu Bilbiie

Publication Date: November 2018

Keyword(s): confidence and fundamental liquidity traps, Fiscal multipliers, forward guidance, monetary policy, neo-Fisherian and optimal policy

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite.

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Bibliographic Reference

Bilbiie, F. 2018. 'Neo-Fisherian Policies and Liquidity Traps'. London, Centre for Economic Policy Research.