search query: @author Schmitt-Grohe, S. / total: 6
reference: 3 / 6
| Author: | Schmitt-Grohe, S. Uribe, M. |
| Title: | The perils of Taylor rules |
| Journal: | Journal of Economic Theory
2001 : JAN-FEB, VOL. 96:1/2, p. 40-69 |
| Index terms: | INTEREST RATES LIQUIDITY INFLATION MODELS EQUILIBRIUM ANALYSIS EQUILIBRIUM THEORY |
| Language: | eng |
| Abstract: | Since John Taylor's seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, the authors argue that once the zero bound on nominal interest rates is taken into account, active interest rate feedback rules can easily lead to unexpected consequences. Specifically, the authors show that even if the steady state at which monetary policy is active is locally the unique equilibrium, typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap, that is, a steady state in which the nominal interest rate is near zero and inflation is possibly negative. |
SCIMA