Tambakis, D.

Determinate liquidity traps

CWPE1522

Abstract: 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 pol- icy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For U.S. 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.

Keywords: Zero bound, Monetary policy, Regime-switching; Determinacy

JEL Codes: E31 E52 E58 E61

Author links: Demosthenes N. Tambakis

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1522.pdf