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Keywords:liquidity trap OR Liquidity trap OR Liquidity Trap 

Working Paper
Liquidity Traps in a Monetary Union

The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest ...
Globalization Institute Working Papers , Paper 397

Working Paper
Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis

This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax ...
Finance and Economics Discussion Series , Paper 2015-38

Working Paper
Money-Financed Fiscal Programs : A Cautionary Tale

A number of prominent economists and policymakers have argued that money-?nanced ?scal programs (helicopter drops) could be e?cacious in boosting output and in?ation in economies facing persistent economic weakness, very low in?ation, and signi?cant ?scal strains. We employ a fairly conventional macroeconomic model to explore the possible e?ects of such policies. While we do ?nd that money-?nanced ?scal programs, if communicated successfully and seen as credible by the public, could provide signi?cant stimulus, we underscore the risks that would be associated with such a program. These risks ...
Finance and Economics Discussion Series , Paper 2017-060

Report
Liquidity Traps and Monetary Policy: Managing a Credit Crunch

We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the ?nancial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity ...
Staff Report , Paper 540

Working Paper
Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia

The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the ...
Finance and Economics Discussion Series , Paper 2014-107

Working Paper
Quantitative Easing in Joseph's Egypt with Keynesian Producers

This paper considers monetary and fiscal policy when tangible assets can be accumulated after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model?s flexible-price allocation mimics Joseph?s saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by tangible assets or the assets ...
Working Paper Series , Paper WP-2014-15

Report
How to escape a liquidity trap with interest rate rules

I study how central banks should communicate monetary policy in liquidity trap scenarios in which the zero lower bound on nominal interest rates is binding. Using a standard New Keynesian model, I argue that the key to anchoring expectations and preventing self-fulfilling deflationary spirals is to promise to keep nominal interest rates pegged at zero for a length of time that depends on the state of the economy. I derive necessary and sufficient conditions for this type of state-contingent forward guidance to implement the welfare-maximizing equilibrium as a globally determinate (that is, ...
Staff Reports , Paper 776

Working Paper
Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record

This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence--both quantitative and narrative--that indicates that the shift in ...
Finance and Economics Discussion Series , Paper 2015-29

Report
An interest rate rule to uniquely implement the optimal equilibrium in a liquidity trap

We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated?either upward or downward?from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. ...
Staff Reports , Paper 745

Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation

Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper Series , Paper WP 2020-01

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