NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Learning to Live in a Liquidity Trap

Jasmina Arifovic, Stephanie Schmitt-Grohé, Martín Uribe

NBER Working Paper No. 23725
Issued in August 2017
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w23725

Published: Jasmina Arifovic & Stephanie Schmitt-Grohé & Martín Uribe, 2018. "Learning to Live in a Liquidity Trap," Journal of Economic Dynamics and Control, .

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