Communication à un séminaire :
(University College London), « Fiscal Policy in an Expectations Driven Liquidity Trap »
, Political Economy Seminar
, TSE, Toulouse, 7 mai 2012, 17:00-18:30, salle AMPHI S.
In the basic New Keynesian model in which the monetary authority operates a Taylor rule,
multiple rational expectations equilibria arise, some of which display all the features of a liquidity
trap. We show that a loss in confidence can set the economy on a deflationary path that
eventually prevents the monetary authority from adjusting the interest rate and can lead to potentially
very large output drops. Contrary to a line of recent papers, we describe equilibria in
which demand stimulating policies become less effective in a liquidity trap than in normal circumstances.
In contrast, supply side policies, such as cuts in labor income taxes, become more
powerful. We show that these results also hold for local deviations from rational expectations.
Keywords: Liquidity trap, fiscal policy, sunspots, confidence shocks