Escapist policy rules

James Bullard; In Koo Cho

doi:10.1016/j.jedc.2005.06.007

Escapist policy rules

James Bullard, In Koo Cho

Economics

Research output: Contribution to journal › Article › peer-review

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 language	English (US)
Pages (from-to)	1841-1865
Number of pages	25
Journal	Journal of Economic Dynamics and Control
Volume	29
Issue number	11
DOIs	https://doi.org/10.1016/j.jedc.2005.06.007
State	Published - Nov 2005

Keywords

Escape dynamics
Learning
Monetary policy rules

ASJC Scopus subject areas

Economics and Econometrics
Control and Optimization
Applied Mathematics

Online availability

10.1016/j.jedc.2005.06.007

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@article{811e35b0805e4953bb24e33bc0994ac2,

title = "Escapist policy rules",

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.",

keywords = "Escape dynamics, Learning, Monetary policy rules",

author = "James Bullard and Cho, {In Koo}",

note = "Funding Information: This paper was originally prepared for a workshop on {\textquoteleft}Learning and Model Misspecification,{\textquoteright} in Cleveland, OH. We thank the Federal Reserve Bank of Cleveland for sponsoring this event, and John Carlson for organizing it. We also thank discussants Stephanie Schmitt-Grohe, Bob Tetlow, Leopold von Thadden, two anonymous referees, and seminar participants at the Texas Monetary Economics Conference, Midwest Macroeconomics, Princeton University, Federal Reserve Macro System Committee, and the Society for Economic Dynamics for helpful comments. In addition, we thank the organizers and participants at the conference {\textquoteleft}Expectations, Learning, and Monetary Policy,{\textquoteright} sponsored by the Deutsche Bundesbank and the Center for Financial Studies, in Frankfurt, Germany, for support and insightful comments.",

year = "2005",

month = nov,

doi = "10.1016/j.jedc.2005.06.007",

language = "English (US)",

volume = "29",

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journal = "Journal of Economic Dynamics and Control",

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publisher = "Elsevier B.V.",

number = "11",

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AU - Bullard, James

AU - Cho, In Koo

N1 - Funding Information: This paper was originally prepared for a workshop on ‘Learning and Model Misspecification,’ in Cleveland, OH. We thank the Federal Reserve Bank of Cleveland for sponsoring this event, and John Carlson for organizing it. We also thank discussants Stephanie Schmitt-Grohe, Bob Tetlow, Leopold von Thadden, two anonymous referees, and seminar participants at the Texas Monetary Economics Conference, Midwest Macroeconomics, Princeton University, Federal Reserve Macro System Committee, and the Society for Economic Dynamics for helpful comments. In addition, we thank the organizers and participants at the conference ‘Expectations, Learning, and Monetary Policy,’ sponsored by the Deutsche Bundesbank and the Center for Financial Studies, in Frankfurt, Germany, for support and insightful comments.

PY - 2005/11

Y1 - 2005/11

N2 - 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.

AB - 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.

KW - Escape dynamics

KW - Learning

KW - Monetary policy rules

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IS - 11

ER -

Escapist policy rules

Abstract

Keywords

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