Neo-Fisherian Policies and Liquidity Traps
Florin O. Bilbiie
- American Economic Journal: Macroeconomics (Forthcoming)
Liquidity traps can be either fundamental, or confidence-driven.
In a simple unified New-Keynesian framework, I provide the
analytical condition for the latter's prevalence: enough shock
persistence and endogenous intertemporal amplification of future ("news") shocks, making income e¤ects dominate substitution effects. The same condition allows Neo-Fisherian effects
(expansionary-inflationary interest-rate increases), which are thus
inherent in confidence traps. Several monetary and fiscal policies
(forward guidance, interest-rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap
variety. This duality provides testable implications to disentangle
between trap types; that is essential, for optimal policies are also
conflicting across trap varieties.
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