Role of expectations in a liquidity trap

Kohei Hasui, Yoshiyuki Nakazono, Yuuki Teranishi

Research output: Contribution to journalArticle

Abstract

A number of previous studies suggest that inflation expectations are important in considering the effectiveness of monetary policy in a liquidity trap. However, the role of inflation expectations can be very different, depending on the type of monetary policy that a central bank implements. This paper reveals how a private agent forms inflation expectation affects the effectiveness of monetary policy under the optimal commitment policy, the Taylor rule, and a simple rule with price-level targeting. We examine two expectation formations: (i) different degrees of anchoring, and (ii) different degrees of forward-lookingness. We show that how to form inflation expectations is less relevant when a central bank implements the optimal commitment policy, while it is critical when the central bank adopts the Taylor rule or a simple rule with price-level targeting. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations under rules other than the optimal commitment policy.

Original languageEnglish
JournalJournal of the Japanese and International Economies
DOIs
Publication statusAccepted/In press - 2019 Jan 1

Fingerprint

liquidity
monetary policy
inflation
central bank
price level
commitment
Inflation expectations
Monetary policy
Liquidity trap
Central bank
economy
economics
Price level targeting
Expectation formation
Simple rules
Taylor rule

Keywords

  • Expectations
  • Liquidity trap
  • Monetary policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

Cite this

Role of expectations in a liquidity trap. / Hasui, Kohei; Nakazono, Yoshiyuki; Teranishi, Yuuki.

In: Journal of the Japanese and International Economies, 01.01.2019.

Research output: Contribution to journalArticle

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