Citation

Discussion Paper Details

Please find the details for DP15422 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Expectations-driven liquidity traps: Implications for monetary and fiscal policy

Author(s): Taisuke Nakata and Sebastian Schmidt

Publication Date: November 2020

Keyword(s): discretion, effective lower bound, Fiscal policy, monetary policy, Policy Delegation and Sunspot equilibria

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely-studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15422

Bibliographic Reference

Nakata, T and Schmidt, S. 2020. 'Expectations-driven liquidity traps: Implications for monetary and fiscal policy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15422