Determinate liquidity traps

- Regime-switching New Keynesian model with recurring Zero Bound (ZB) episodes.
- Determinacy imposes trade-off between ZB frequency and expected duration.
- Longer ZB episodes are less likely to be determinate.
- Fundamental transmission is sensitive to ZB frequency and shock persistence.
- “Puzzling” transmission properties do not arise for determinate ZB episodes and aggressive active policy stance.

I study the long run determinacy tradeoff-recurrent episodes of passive monetary policy are (in)determinate if their expected duration is long (brief)-when passive policy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For US baseline parameter values, I find temporary fiscal stimulus is effective, while adverse supply shocks can be expansionary if the central bank's active policy stance is weak and/or if the liquidity trap's average duration exceeds 3 quarters.