Wealth Effects, the Taylor Rule and the Liquidity Trap
32 Pages Posted: 14 May 2007
Date Written: May 2007
This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, the operation of wealth effects does not avoid the occurrence of liquidity traps when the central bank implements a Taylor-type interest-rate feed back rule.
Keywords: Wealth Effects,Taylor Rules, Liquidity Traps
JEL Classification: E31, E52
Suggested Citation: Suggested Citation