American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy
American Economic Journal: Macroeconomics
(pp. 68–103)
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 policy-maker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.Citation
Nakata, Taisuke, and Sebastian Schmidt. 2022. "Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy." American Economic Journal: Macroeconomics 14 (4): 68–103. DOI: 10.1257/mac.20190228Additional Materials
JEL Classification
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- E61 Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62 Fiscal Policy
- E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy