2021/04/06 by Alessandro Piergallini, Piergallini, Alessandro
Economics, Econometrics and Finance · #FOS: Economics and business #Theoretical Economics (econ.TH) #econ.TH
paper · pdf · doi:10.48550/arxiv.2104.02753
arxiv created 2021/04/06 · arxiv updated 2021/04/08
I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self-fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes - implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories - are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity-trap steady state exist, causing global indeterminacy.