Conservatism and Liquidity Traps

Nakata, Taisuke; Schmidt, Sebastian

Conservatism and Liquidity Traps

ECB Working Paper No. 1816

49 Pages Posted: 23 Jun 2015

See all articles by Taisuke Nakata

Taisuke Nakata

Board of Governors of the Federal Reserve System

Sebastian Schmidt

European Central Bank (ECB)

There are 3 versions of this paper

Date Written: June 23, 2015

Abstract

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.

Keywords: Deflationary Bias; Inflation Conservatism; Inflation Targeting; Liquidity Traps; Zero Lower Bound

JEL Classification: E52, E61

Suggested Citation: Suggested Citation

Nakata, Taisuke and Schmidt, Sebastian, Conservatism and Liquidity Traps (June 23, 2015). ECB Working Paper No. 1816. Available at SSRN: https://ssrn.com/abstract=2621967