Clearing Up the Effective Lower Bound Morass

2025/11/06 by Ma, Haochun, Roulleau-Pasdeloup, Jordan
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Economic Policies and Impacts #Economic theories and models

paper · doi:10.48550/arxiv.2511.04782

Abstract

Depending on the persistence of the underlying Markov chain shock, the standard New Keynesian model predicts starkly different conclusions at the Effective Lower Bound. We clear up this morass by using a truncated Markov chain. We prove that the expectations-driven trap à la Mertens & Ravn (2014) doesn't arise as an equilibrium outcome. In addition, the equilibrium under a truncated Markov chain is guaranteed to be unique, the effect of government spending is positive on consumption and does not switch signs but may grow unbounded \textemdash a puzzle.

Citations

• Endogenous Persistence at the Effective Lower Bound
• Coherence without Rationality at the Zero Lower Bound
• Coherence without rationality at the zero lower bound
• The unbearable lightness of equilibria in a low interest rate\n environment

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