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Wealth effects, the Taylor rule and the liquidity trap
Author(s) -
Annicchiarico Barbara,
Marini Giancarlo,
Piergallini Alessandro
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.1742-7363.2009.00112.x
Subject(s) - taylor rule , liquidity trap , economics , nominal interest rate , inflation (cosmology) , market liquidity , interest rate , zero lower bound , monetary policy , overlapping generations model , monetary economics , mathematical economics , trap (plumbing) , keynesian economics , real interest rate , econometrics , central bank , microeconomics , liquidity risk , physics , theoretical physics , meteorology
This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations à la Yaari–Blanchard–Weil. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, in the presence of wealth effects, the occurrence of liquidity traps is not avoided when the central bank implements a Taylor‐type interest‐rate feedback rule.