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Wealth effects, the Taylor rule and the liquidity trap

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  • Barbara Annicchiarico
  • Giancarlo Marini
  • Alessandro Piergallini

Abstract

This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations à la Yaari–Blanchard–Weil. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, in the presence of wealth effects, the occurrence of liquidity traps is not avoided when the central bank implements a Taylor‐type interest‐rate feedback rule.

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  • Barbara Annicchiarico & Giancarlo Marini & Alessandro Piergallini, 2009. "Wealth effects, the Taylor rule and the liquidity trap," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(3), pages 315-331, September.
    • Handle: RePEc:bla:ijethy:v:5:y:2009:i:3:p:315-331
    DOI: 10.1111/j.1742-7363.2009.00112.x
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    1. 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.
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    3. Barbara Annicchiarico & Giancarlo Marini & Alessandro Piergallini, 2009. "Wealth effects, the Taylor rule and the liquidity trap," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(3), pages 315-331, September.
    4. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
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    Cited by:

    1. Barbara Annicchiarico & Giancarlo Marini & Alessandro Piergallini, 2009. "Wealth effects, the Taylor rule and the liquidity trap," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(3), pages 315-331, September.
    2. Khalid, Norlin, 2018. "Monetary and Fiscal Regimes Policy Rules in a Discrete Time Model," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(2), pages 95-108.
    3. Rym Aloui & Michel Guillard, 2009. "A Simple “Public Debt-Deflation” Theory: Leeper revisited," Documents de recherche 09-11, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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