Expectations Driven Liquidity Traps
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Expectations-driven Liquidity Traps
Author | : Taisuke Nakata |
Publisher | : |
Total Pages | : 38 |
Release | : 2020 |
Genre | : Fiscal policy |
ISBN | : |
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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.
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