Learning to Live in a Liquidity Trap / Jasmina Arifovic, Stephanie Schmitt-Grohé, Martín Uribe.

Format:

Book

Author/Creator:

Arifovic, Jasmina.

Contributor:

National Bureau of Economic Research.

Schmitt-Grohé, Stephanie.

Uribe, Martín.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23725.

NBER working paper series no. w23725

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank's ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation.

Notes:

Print version record

August 2017.