Unconventional policies in state-dependent liquidity traps

Tayler, William J. and Zilberman, Roy (2024) Unconventional policies in state-dependent liquidity traps. Journal of Economic Dynamics and Control, 168: 104956. ISSN 0165-1889

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Abstract

We characterize optimal unconventional monetary and fiscal-financial policies against supply- and demand-driven liquidity traps within a tractable New Keynesian model featuring a cash-in-advance constraint and a monetary policy cost channel. Deposit subsidies circumvent the inflation-output trade-off arising from stagflationary shocks and supply-driven liquidity traps by enabling negative nominal interest rates. Additionally, deposit taxes facilitate modest interest rate hikes to escape demand-driven deflationary traps. Notably, discretionary and commitment policies with deposit taxes / subsidies deliver virtually equivalent welfare gains, rendering time-inconsistent forward guidance schedules unnecessary. We also derive robust and implementable optimal policy rules when the sources of shocks are unknown.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Economic Dynamics and Control
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2600/2606
Subjects:
?? deposit tax-subsidycost channeloptimal policydiscretion vs. commitmentzero lower boundcontrol and optimizationeconomics and econometricsapplied mathematicse44e52e58e63 ??
ID Code:
223740
Deposited By:
Deposited On:
06 Sep 2024 10:50
Refereed?:
Yes
Published?:
Published
Last Modified:
25 Sep 2024 01:05