DP13334 Neo-Fisherian Policies and Liquidity Traps
Author(s): | Florin Ovidiu Bilbiie |
Publication Date: | November 2018 |
Date Revised: | November 2018 |
Keyword(s): | confidence and fundamental liquidity traps, Fiscal multipliers, forward guidance, monetary policy, neo-Fisherian, optimal policy |
JEL(s): | E3, E4, E5, E6 |
Programme Areas: | Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=13334 |
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.