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Liquidity Traps, Learning and Stagnation


George W. Evans


University of Oregon - Department of Economics; University of Saint Andrews - School of Economics and Finance

Eran Guse


University of Cambridge - Faculty of Economics and Politics

Seppo Honkapohja


Bank of Finland; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

June 2007

CEPR Discussion Paper No. DP6355

Abstract:     
We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.

Number of Pages in PDF File: 38

Keywords: Adaptive learning, fiscal policy, indeterminacy, monetary policy, zero interest rate lower bound

JEL Classification: E52, E58, E63

working papers series


Date posted: May 23, 2008  

Suggested Citation

Evans, George W., Guse, Eran A. and Honkapohja, Seppo, Liquidity Traps, Learning and Stagnation (June 2007). , Vol. , pp. -, 2007. Available at SSRN: http://ssrn.com/abstract=1136681

Contact Information

George W. Evans (Contact Author)
University of Oregon - Department of Economics ( email )
1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)
University of Saint Andrews - School of Economics and Finance ( email )
The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)
HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml
Eran A. Guse
University of Cambridge - Faculty of Economics and Politics ( email )
Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
Seppo Honkapohja
Bank of Finland ( email )
P.O. Box 160
FIN-00101 Helsinki
Finland
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Feedback to SSRN (Beta)


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References:  28
Citations:  7

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