Monetary and Fiscal Policy in a Liquidity Trap with Ination Persistence
نویسنده
چکیده
This paper relies on the new Keynesian model with ination persistence to characterize the optimal monetary and scal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can lift the economy out of depression. The central bank does not need to commit beyond the end of the crisis to get some traction on the level of economic activity. Regarding scal policy, ination persistence justi es some front-loading of government expenditures to get ination started, which reduces the real interest rate. The magnitude of the optimal scal stimulus is decreasing in the degree of ination persistence. Finally, if ination persistence is due to adaptive expectations, rather than to price indexation, then monetary policy is ine¤ective while the optimal scal stimulus is large and heavily front-loaded. Keywords: Commitment, Ination persistence, Liquidity trap, Monetary and scal policy JEL Classi cation: E12, E52, E62, E63
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