Article ID Journal Published Year Pages File Type
9732023 Review of Economic Dynamics 2005 21 Pages PDF
Abstract
We consider inflation and debt dynamics under a global interest rate rule when private agents forecast using adaptive learning. Given the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low-inflation steady state. Under learning the economy can slip below this low-inflation steady state and be driven to an even lower inflation floor supported by a switch to an aggressive money supply rule. Fiscal policy alone cannot push the economy out of this liquidity trap. Raising the inflation floor sufficiently can ensure a return to the target equilibrium.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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