This paper reports on the findings of Evans, Guse and Honkapohja (2007) concerning the global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy the intended steady state is locally but...

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Bibliographic Details

Main Author:	Evans, George W. 1949- (Author)
Format:	Book
Language:	English
Published:	Tokyo IMES 2007
Series:	Discussion paper series / Institute for Monetary and Economic Studies, Bank of Japan 2007,15
Subjects:	Mathematisches Modell Fiscal policy > Mathematical models Interest rates > Mathematical models Liquidity (Economics) Monetary policy > Mathematical models
Online Access:	Volltext
Summary:	This paper reports on the findings of Evans, Guse and Honkapohja (2007) concerning the global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with inflation threshold policies: if under normal policies inflation would fall below a suitably chosen threshold, these policies should be replaced by aggressive monetary and fiscal policies that guarantee this lower bound on inflation.--Author's description.
Physical Description:	31 S. graph. Darst.