Speed Limit Policy and Liquidity Traps

28 Pages Posted: 23 Jul 2018 Last revised: 21 Feb 2019

See all articles by Taisuke Nakata

Taisuke Nakata

Board of Governors of the Federal Reserve System

Sebastian Schmidt

European Central Bank (ECB)

Paul Yoo

Kogod School of Business - American University

Multiple version iconThere are 2 versions of this paper

Date Written: July, 2018

Abstract

The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)---policies aimed at stabilizing the output growth---less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.

JEL Classification: E52, E61

Suggested Citation

Nakata, Taisuke and Schmidt, Sebastian and Yoo, Paul, Speed Limit Policy and Liquidity Traps (July, 2018). FEDS Working Paper No. 2018-50, Available at SSRN: https://ssrn.com/abstract=3217786 or http://dx.doi.org/10.17016/FEDS.2018.050

Taisuke Nakata (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sebastian Schmidt

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paul Yoo

Kogod School of Business - American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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