Article
Licensed
Unlicensed
Requires Authentication
Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
-
Ragna Alstadheim
Published/Copyright:
November 2, 2006
Abstract
We study standard monetary-policy rules with inflation-rate targets and either interest-rate or money-supply instruments using a flexible-price, perfect-foresight model. We focus mainly on interest-rate rules, but the results for money-supply rules are analogous. A locally-unique target equilibrium always exists. There are also below-target equilibria (BTE) with inflation below target and constant or asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary nor sufficient for BTE. Such equilibria can also arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE. All are non-monotonic and discontinuous in current inflation. Each implies a difference equation in inflation. Some of these difference equations are continuous, but others are not. They are all non-monotonic and non-differentiable at a point. We argue that Japan's difficulties in the 1990s were probably the result of a stabilization problem rather than an indeterminacy problem.
Published Online: 2006-11-02
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
You are currently not able to access this content.
You are currently not able to access this content.
Articles in the same Issue
- Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
- Frontiers Article
- 10.2202/1534-6013.1320
- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
- Quantifying the Effects of the Demographic Transition in Developing Economies
- Inflation, Prices, and Information in Competitive Search
- Contributions Article
- Inflation Inertia in Sticky Information Models
- Job Separation Under Uncertainty and the Wage Distribution
- A Closed Form Solution to the Ramsey Model
- Convergence and Stability in U.S. Employment Rates
- What Does the Solow Model Tell Us about Economic Growth?
- Consumption and Health
- Capital Maintenance versus Technology Adoption Under Embodied Technical Progress
- Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly 'Open Market'
- Does Inflation Grease the Wheels of the Labor Market?
- The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
- A Search-Theoretic Monetary Business Cycle Model with Capital Formation
- Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
- Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint
- Topics Article
- Contracts and Money Revisited
- On the Use of Substitutability as a Measure of Competition
- Can the AK Model Be Rescued? New Evidence from Unit Root Tests with Good Size and Power
- How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes
- Uncertainty and Debt-Maturity in Emerging Markets
- Quantitative Monetary Easing and Risk in Financial Asset Markets
- Using Investment Data to Assess the Importance of Price Mismeasurement
- Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003
- Long-Run Money Growth and the Liquidity Effect
- Differentiability of the Efficient Frontier when Commitment to Risk Sharing is Limited
- A Model of Veblenian Growth
- Human Capital Composition, R&D and the Increasing Role of Services
- The Allocation of Labor and Endogenous Search Decisions
- Bank Lending with Imperfect Competition and Spillover Effects
- Convergence Across Italian Regions and the Role of Technological Catch-Up
Keywords for this article
monetary policy;
zero bound;
liquidity trap;
inflation targeting;
indeterminacy
Articles in the same Issue
- Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
- Frontiers Article
- 10.2202/1534-6013.1320
- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
- Quantifying the Effects of the Demographic Transition in Developing Economies
- Inflation, Prices, and Information in Competitive Search
- Contributions Article
- Inflation Inertia in Sticky Information Models
- Job Separation Under Uncertainty and the Wage Distribution
- A Closed Form Solution to the Ramsey Model
- Convergence and Stability in U.S. Employment Rates
- What Does the Solow Model Tell Us about Economic Growth?
- Consumption and Health
- Capital Maintenance versus Technology Adoption Under Embodied Technical Progress
- Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly 'Open Market'
- Does Inflation Grease the Wheels of the Labor Market?
- The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
- A Search-Theoretic Monetary Business Cycle Model with Capital Formation
- Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
- Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint
- Topics Article
- Contracts and Money Revisited
- On the Use of Substitutability as a Measure of Competition
- Can the AK Model Be Rescued? New Evidence from Unit Root Tests with Good Size and Power
- How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes
- Uncertainty and Debt-Maturity in Emerging Markets
- Quantitative Monetary Easing and Risk in Financial Asset Markets
- Using Investment Data to Assess the Importance of Price Mismeasurement
- Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003
- Long-Run Money Growth and the Liquidity Effect
- Differentiability of the Efficient Frontier when Commitment to Risk Sharing is Limited
- A Model of Veblenian Growth
- Human Capital Composition, R&D and the Increasing Role of Services
- The Allocation of Labor and Endogenous Search Decisions
- Bank Lending with Imperfect Competition and Spillover Effects
- Convergence Across Italian Regions and the Role of Technological Catch-Up
