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Liquidity Traps: an Interest‐rate‐based Exit Strategy
Author(s) -
SchmittGrohé Stephanie,
Uribe Martín
Publication year - 2014
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12065
Subject(s) - interest rate , economics , market liquidity , inflation (cosmology) , taylor rule , nominal interest rate , path (computing) , liquidity trap , monetary economics , set (abstract data type) , inflation rate , monetary policy , real interest rate , macroeconomics , econometrics , keynesian economics , central bank , liquidity risk , computer science , physics , theoretical physics , programming language
This paper proposes a strategy for escaping liquidity traps based on an augmented Taylor‐type interest‐rate feedback rule that differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate that reaches the intended target for this policy instrument in finite time. The proposed policy is designed to set a floor on inflationary expectations. Importantly, the effectiveness of the proposed exiting strategy does not rely on the existence of an accompanying fiscalist (or non‐Ricardian) fiscal stance.