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Faculty of Economics

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Determinate liquidity traps

Economics Letters

Vol. 135 pp. 126-132 (2015)

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 policy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For US 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 33 quarters.

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

JEL Codes: E31, E52, E58, E61

Author links: Demosthenes N.  Tambakis  

Publisher's Link:

Cambridge Working Paper in Economics Version of Paper: Determinate liquidity traps, Tambakis, D., (2015)

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