NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The New-Keynesian Liquidity Trap

John H. Cochrane

NBER Working Paper No. 19476
Issued in September 2013
NBER Program(s):   AP   EFG   ME

In standard solutions, the new-Keynesian model produces a deep recession with deflation in a liquidity trap. The model also makes unusual policy predictions: Useless government spending, technical regress, and capital destruction have large multipliers. These predictions become larger as prices become less sticky. I show that both sets of predictions are strongly affected by equilibrium selection. For the same interest-rate path, different choices of equilibria - either by the researcher's direct selection or the researcher's specification of expected Federal Reserve policy - can overturn all these results. A set of "local-to-frictionless" equilibria predicts mild inflation, no output reduction and negative multipliers during the liquidity trap, and its predictions approach the frictionless model smoothly, all for the same interest rate path.

download in pdf format
   (466 K)

email paper

This paper was revised on October 21, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19476

Users who downloaded this paper also downloaded these:
Goldberg and Grisse w19523 Time Variation in Asset Price Responses to Macro Announcements
Jurado, Ludvigson, and Ng w19456 Measuring Uncertainty
Goldberg w19497 Banking Globalization, Transmission, and Monetary Policy Autonomy
Fleckenstein, Longstaff, and Lustig w19238 Deflation Risk
Werning w17344 Managing a Liquidity Trap: Monetary and Fiscal Policy
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us