Escapist policy rules

James Bullard, In Koo Cho

Research output: Contribution to journalArticle

Abstract

We study a simple, microfounded macroeconomic system in which the monetary authority employs a Taylor-type policy rule. We analyze situations in which the self-confirming equilibrium is unique and learnable, and explore the prospects for the use of 'large deviation' theory. We show that the system can sometimes depart from the self-confirming equilibrium towards a non-equilibrium outcome characterized by persistently low nominal interest rates and persistently low inflation. These events that have some of the properties of 'liquidity traps' observed in the data, even though the policymaker remains committed to a Taylor-type policy rule which otherwise has desirable stabilization properties.

Original languageEnglish (US)
Pages (from-to)1841-1865
Number of pages25
JournalJournal of Economic Dynamics and Control
Volume29
Issue number11
DOIs
StatePublished - Nov 1 2005

Keywords

  • Escape dynamics
  • Learning
  • Monetary policy rules

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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