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Kevin XD Huang and Nam T Vu
 
''Rare but Long-lasting Liquidity Traps and Fiscal Stimulus''
 
 
A DSGE model with (i) state-dependent pricing and (ii) history-dependent monetary policy that compensates for lost opportunities of cutting the nominal interest rate due to a binding effective zero lower bound (ZLB) generates rare but long-lasting liquidity traps with endogenous transitions between the traps and normal times. Dynamic government spending multipliers (GSMs) are typically above unity in the liquidity traps but are uniformly below unity in normal times. Without (i) or (ii), the model generates only short-lived ZLB events while producing below-unity GSMs irrespective of the state of the economy.
 
 
Keywords: State-dependent pricing, history-dependent monetary policy, zero lower bound, fiscal stimulus, dynamic government spending multipliers
JEL: E0 - Macroeconomics and Monetary Economics: General
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
 
Manuscript Received : Dec 01 2019 Manuscript Accepted : Dec 08 2019

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