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Liquidity traps with global Taylor Rules
Author(s) -
SchmittGrohé Stephanie,
Uribe Martín
Publication year - 2009
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2008.00095.x
Subject(s) - economics , taylor rule , commit , market liquidity , bounded function , liquidity trap , interest rate , mathematical economics , monetary economics , monetary policy , zero (linguistics) , keynesian economics , liquidity crisis , mathematics , computer science , central bank , philosophy , mathematical analysis , linguistics , database
An important theme in the writings of Jess Benhabib is the global stability of equilibrium in monetary economies. A key result emerging from his research is that Taylor‐type interest rate feedback rules that are bounded below by zero can lead to unintended liquidity traps. The present paper shows that even if the interest rate rule is not bounded below by zero, that is, even if the government could credibly commit to a globally active Taylor rule, self‐fulfilling liquidity traps cannot be ruled out. This result is shown to obtain in models with flexible and sticky prices and under continuous and discrete time.