Liquidity Traps: An Interest-Rate-Based Exit Strategy / Stephanie Schmitt-Grohé, Martín Uribe.

Format:

Book

Author/Creator:

Schmitt-Grohé, Stephanie.

Contributor:

National Bureau of Economic Research.

Uribe, Martín.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16514.

NBER working paper series no. w16514

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Liquidity Traps

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

This paper analyzes a potential strategy for escaping liquidity traps. The strategy is based on an augmented Taylor-type interest-rate feedback rule and differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate. This path reaches the intended target for this policy instrument in finite time. The policy we study is designed to raise inflationary expectations over time while at the same time maintaining all of the desirable local properties of the Taylor principle in a neighborhood of the intended inflation target. Importantly, the effectiveness of the potential exit strategy studied in this paper does not rely on the existence of an accompanying fiscalist (or non-Ricardian) fiscal stance.

Notes:

Print version record

November 2010.