Escapist policy rules

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Escapist policy rules

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James Bullard
In-Koo Cho

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James Bullard

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 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 in- flation. 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 Federal Reserve Bank of St. Louis in its series Working Papers with number 2002-002.

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Date of creation: 2003
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Handle: RePEc:fip:fedlwp:2002-002

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Article
- Bullard, James & Cho, In-Koo, 2005. "Escapist policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1841-1865, November. [Downloadable!] (restricted)
Paper
- James Bullard, & In-Koo Cho, 2003. "Escapist Policy Rules," CFS Working Paper Series 2003/38, Center for Financial Studies. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-06-13 (All new papers)

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Other versions:
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Other versions:
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Other versions:
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