Avoiding Liquidity Traps (original) (raw)

Ssrn Electronic Journal, 2000

Abstract

Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps, as monetary pol- icy is ineffective in bringing about the government's goals regarding the stability of output

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