Avoiding liquidity traps

Jess Benhabib, Stephanie Schmitt-Grohé, Martín Uribe

    Research output: Contribution to journalArticle

    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 since monetary policy is ineffective in bringing about the government's goals regarding the stability of output and prices. This paper proposes several fiscal and monetary policies that preserve the appealing features of Taylor rules, such as local uniqueness of equilibrium near the inflation target, and at the same time rule out the deflationary expectations that can lead an economy into a liquidity trap.

    Original languageEnglish (US)
    Pages (from-to)535-563
    Number of pages29
    JournalJournal of Political Economy
    Volume110
    Issue number3
    DOIs
    StatePublished - Jan 1 2002

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    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Benhabib, J., Schmitt-Grohé, S., & Uribe, M. (2002). Avoiding liquidity traps. Journal of Political Economy, 110(3), 535-563. https://doi.org/10.1086/339713