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 according to Bullard and Mitra (2002). We explore the prospects for the use of ‘large deviation’ theory in this context, as employed by Sargent (1999) and Cho, Williams, and Sargent (2002). We show that our 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. Thus we generate 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.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2003/38.
Length: 35 pages Date of creation: 07 Feb 2003 Date of revision: Handle: RePEc:cfs:cfswop:wp200338
Note: An earlier version was presented at the research conference "Expectations, Learning and Monetary Policy" August 2003 sponsored by the Deutsche Bundesbank, the Journal of Economic Dynamics and Control (JEDC) and the Center for Financial Studies (CFS). This paper was originally prepared for a workshop on "Learning and Model Misspecification," in Cleveland, Ohio. 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, and seminar participants. Contact details of provider: Postal: House of Finance, Gr�neburgplatz 1, HPF H5, D-60323 Frankfurt am Main Phone: +49 (0)69 798-30050 Fax: +49 (0)69 798-30077 Email: Web page: http://www.ifk-cfs.de/ More information through EDIRC
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Woodford, Michael, 1990.
"Learning to Believe in Sunspots,"
Econometrica,
Econometric Society, vol. 58(2), pages 277-307, March.
[Downloadable!] (restricted)
Other versions:
Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001.
"The Perils of Taylor Rules,"
Journal of Economic Theory,
Elsevier, vol. 96(1-2), pages 40-69, January.
[Downloadable!] (restricted)
Other versions:
Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998.
"The Perils of Taylor Rules,"
Working Papers
98-37, C.V. Starr Center for Applied Economics, New York University.
[Downloadable!]
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