Eliminating a deflationary trap through superinertial interest rate rules

Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy

“…the lower bound constraint is binding. Sugo and Ueda (2008) and Schmitt-Grohé and Uribe (2014) consider alternative interest-rate feedback rules. Schmidt (2016) shows that it is possible to design Ricardian government spending rules that insulate the economy from expectations-driven liquidity traps.…”

Policy Regime Change Against Chronic Deflation? Policy Option Under Long-Term Liquidity Trap

“…If ρ = 1, monetary policy corresponds to price-level targeting. If ρ > 1, the monetary policy rule entails a superinertia and a deflationary trap can be eliminated, as is shown by Sugo and Ueda (2008b). Parameter c, an intercept in the equations, illustrates a term premium and/or a natural rate of interest.…”

“…Figure 1 illustrates that if monetary policy follows a Taylor type of rule, multiple equilibria emerge with two steady states as the crossing points between the policy rule and the Fisher equation. The so-called deflationary steady state emerges, even if commitment to a positive target level of inflation is fully credible.Once the economy gets stuck there, a superinertial monetary policy rule or the price level targeting can eliminate the deflationary trap, as investigated bySugo and Ueda (2008b). Thus, if the deflation continues as a result of the economy being stuck at the deflationary steady state, policy regime shift is the only theoretical way to exit from…”

Lack of confidence, the zero lower bound, and the virtue of fiscal rules

“…Correia et al (2013) show in the context of a New Keynesian model how a mix of distortionary taxes can be used to completely circumvent the zero nominal interest rate bound problem. Alstadheim and Henderson (2006) and Sugo and Ueda (2008) consider steady state equilibria and propose monetary policy rules that eliminate the liquidity trap steady state equilibrium. Schmitt- Grohe and Uribe (2012) and Schmitt-Grohe and Uribe (2014) design interest-rate-rule-based exit strategies from deflationary trajectories towards the liquidity trap steady state.…”