Citation

Discussion Paper Details

Please find the details for DP2969 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Liquidity Traps with Global Taylor Rules

Author(s): Stephanie Schmitt-Groh� and Mart�n Uribe

Publication Date: September 2001

Keyword(s): liquidity traps, Taylor rules and zero-bound on nominal interest rates

Programme Area(s): International Macroeconomics

Abstract: A key result of a recent literature that focuses on the global consequences of Taylor-type interest rate feedback rules is that such rules, in combination with the zero-bound on nominal interest rates, can lead to unintended liquidity traps. An immediate question posed by this result is whether the government could avoid liquidity traps by ignoring the zero-bound, that is, by threatening to set the nominal interest rate at a negative value should the inflation rate fall below a certain threshold. This Paper shows that even if the government could credibly commit to setting the interest rate at a negative value, self-fulfilling liquidity traps can still emerge. That is, deflationary equilibria originating arbitrarily near the intended equilibrium and leading to low (possibly zero) interest rates and low (and possibly negative) rates of inflation cannot be ruled out by lifting the zero-bound on the monetary policy rule. This result obtains in models with flexible and sticky prices and under continuous and discrete time.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2969

Bibliographic Reference

Schmitt-Groh�, S and Uribe, M. 2001. 'Liquidity Traps with Global Taylor Rules'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2969