Expectations, Deflation Traps and Macroeconomic Policy
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Date
2009-07-06
Authors
Evans, George W., 1949-
Honkapohja, Seppo, 1951-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
We examine global economic dynamics under infinite-horizon learning
in a New Keynesian model in which the interest-rate rule is subject
to the zero lower bound. As in Evans, Guse and Honkapohja (2008),
we find that under normal monetary and fiscal policy the intended
steady state is locally but not globally stable. Unstable deflationary
paths can arise after large pessimistic shocks to expectations. For large
expectation shocks pushing interest rates to the zero lower bound, temporary
increases in government spending can be used to insulate the
economy from deflation traps.
Description
32 p.
Keywords
Adaptive learning, Monetary policy, Fiscal policy, Zero interest rate lower bound