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

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-07-19

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.

Keywords: Liquidity traps, Markov-perfect equilibrium, Speed limit policy, Zero lower bound

JEL Classification: E52, E61

Suggested Citation

Nakata, Taisuke and Schmidt, Sebastian and Yoo, Paul, Speed Limit Policy and Liquidity Traps (2018-07-19). FEDS Working Paper No. 2018-050. 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

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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