IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v89y2018icp120-136.html
   My bibliography  Save this article

Learning to live in a liquidity trap

Author

Listed:
  • Arifovic, Jasmina
  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Abstract

The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank’s ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation.

Suggested Citation

  • Arifovic, Jasmina & Schmitt-Grohé, Stephanie & Uribe, Martín, 2018. "Learning to live in a liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 120-136.
    • Handle: RePEc:eee:dyncon:v:89:y:2018:i:c:p:120-136
    DOI: 10.1016/j.jedc.2018.01.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165188918300058
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2018.01.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. Lux, Thomas & Schornstein, Sascha, 2005. "Genetic learning as an explanation of stylized facts of foreign exchange markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 169-196, February.
    3. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
    4. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    5. Evans, George W. & Guse, Eran & Honkapohja, Seppo, 2008. "Liquidity traps, learning and stagnation," European Economic Review, Elsevier, vol. 52(8), pages 1438-1463, November.
    6. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    7. repec:bla:manchs:v:67:y:1999:i:0:p:1-35 is not listed on IDEAS
    8. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Athanasios Geromichalos & Lucas Herrenbrueck, 2022. "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 134-167, July.
    2. He Nie & Jordan Roulleau-Pasdeloup, 2023. "The promises (and perils) of control-contingent forward guidance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 77-98, July.
    3. Robert Kollmann, 2021. "Effects of Covid-19 on Euro area GDP and inflation: demand vs. supply disturbances," International Economics and Economic Policy, Springer, vol. 18(3), pages 475-492, July.
    4. Lucio Gobbi & Ronny Mazzocchi & Roberto Tamborini, 2022. "Monetary policy, rational confidence, and Neo‐Fisherian depressions," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 1179-1199, November.
    5. Robert Kollmann, 2021. "Liquidity traps in a monetary union," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1581-1603.
    6. Evans, George & Gibbs, Christopher & McGough, Bruce, 2021. "A Unified Model of Learning to Forecast," Working Papers 2021-10, University of Sydney, School of Economics.
    7. Kollmann, Robert, 2021. "Liquidity traps in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    8. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    9. Hommes, Cars, 2018. "Behavioral & experimental macroeconomics and policy analysis: a complex systems approach," Working Paper Series 2201, European Central Bank.
    10. Gilles Dufrénot & Meryem Rhouzlane, 2018. "Secular Stagnation: New Challenges for the Industrialized Countries in the 21st Century," Working Papers halshs-01821669, HAL.
    11. Petersen, Luba & Rholes, Ryan, 2022. "Macroeconomic expectations, central bank communication, and background uncertainty: A COVID-19 laboratory experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    12. Chattopadhyay, Siddhartha & Ghosh, Taniya, 2020. "Taylor Rule implementation of the optimal policy at the zero lower bound: Does the cost channel matter?," Economic Modelling, Elsevier, vol. 89(C), pages 351-366.
    13. Brendon, Charles & Paustian, Matthias & Yates, Tony, 2020. "Self-fulfilling recessions at the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 213-232.
    14. Gobbi, Lucio & Mazzocchi, Ronny & Tamborini, Roberto, 2019. "Monetary policy, de-anchoring of inflation expectations, and the “new normal”," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    15. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.
    16. Maksim Isakin & Phuong V. Ngo, 2022. "Multiplicity in New Keynesian Models," Open Economies Review, Springer, vol. 33(3), pages 505-521, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karel R. S. M. Mertens & Morten O. Ravn, 2014. "Fiscal Policy in an Expectations-Driven Liquidity Trap," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1637-1667.
    2. Siddhartha Chattopadhyay, 2013. "Liquidity Trap and the Conditional Policy Commitment: An Analysis under Adaptive Learning," South Asian Journal of Macroeconomics and Public Finance, , vol. 2(1), pages 1-32, June.
    3. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    4. Goy, Gavin & Hommes, Cars & Mavromatis, Kostas, 2022. "Forward guidance and the role of central bank credibility under heterogeneous beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1240-1274.
    5. Bullard, James & Cho, In-Koo, 2005. "Escapist policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1841-1865, November.
    6. Hommes, Cars & Lustenhouwer, Joep, 2019. "Inflation targeting and liquidity traps under endogenous credibility," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 48-62.
    7. George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2022. "Expectations, Stagnation, And Fiscal Policy: A Nonlinear Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1397-1425, August.
    8. Evans, George W. & Honkapohja, Seppo, 2009. "Expectations, deflation traps and macroeconomic policy," Bank of Finland Research Discussion Papers 24/2009, Bank of Finland.
    9. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    10. repec:zbw:bofrdp:2009_024 is not listed on IDEAS
    11. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859, Elsevier.
    12. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
    13. Evans, George & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Bank of Finland Research Discussion Papers 8/2011, Bank of Finland.
    14. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    15. Evans, George W. & Honkapohja, Seppo, 2009. "Expectations, Deflation Traps and Macroeconomic Policy," CEPR Discussion Papers 7397, C.E.P.R. Discussion Papers.
    16. repec:zbw:bofrdp:2021_014 is not listed on IDEAS
    17. Gobbi, Lucio & Mazzocchi, Ronny & Tamborini, Roberto, 2019. "Monetary policy, de-anchoring of inflation expectations, and the “new normal”," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    18. Eo, Yunjong & McClung, Nigel, 2021. "Determinacy and E-stability with interest rate rules at the zero lower bound," Research Discussion Papers 14/2021, Bank of Finland.
    19. Ragna Alstadheim & Øistein Røisland, 2017. "When Preferences for a Stable Interest Rate Become Self‐Defeating," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 393-415, March.
    20. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Econometric Society 2004 North American Summer Meetings 101, Econometric Society.
    21. Hommes, C.H. & Lustenhouwer, J., 2016. "Managing Heterogeneous and Unanchored Expectations: A Monetary Policy Analysis," CeNDEF Working Papers 16-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    22. Piotr Ciżkowicz & Andrzej Rzońca & Andrzej Torój, 2019. "In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment," German Economic Review, Verein für Socialpolitik, vol. 20(4), pages 1028-1053, November.
    23. Honkapohja, Seppo & Mitra, Kaushik, 2020. "Price level targeting with evolving credibility," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 88-103.

    More about this item

    Keywords

    Liquidity trap; Social learning; Monetary policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:89:y:2018:i:c:p:120-136. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.