American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Neo-Fisherian Policies and Liquidity Traps
American Economic Journal: Macroeconomics
(pp. 378–403)
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 allows neo-Fisherian effects (expansionary-inflationary interest rate increases), which are thus inherent in confidence traps. Several monetary and 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 also conflicting across trap varieties.Citation
Bilbiie, Florin O. 2022. "Neo-Fisherian Policies and Liquidity Traps." American Economic Journal: Macroeconomics 14 (4): 378–403. DOI: 10.1257/mac.20200119Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E62 Fiscal Policy