Liquidity Trap in an Inflationtargeting Framework: A Graphical
Analysis1
Pavel Kapinos
Abstract
This paper presents a simple New Keynesian model with alternative assumptions regarding the conduct of
monetary policy.
The central bank is assumed to either...
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Liquidity Trap in an Inflationtargeting Framework: A Graphical
Analysis1
Pavel Kapinos
Abstract
This paper presents a simple New Keynesian model with alternative assumptions regarding the conduct of
monetary policy.
The central bank is assumed to either follow a Taylor rule or minimise a social welfare loss
function.
The model can be tractably described by means of a straightforward graphical apparatus, which, so
far, has not been extended to include the treatment of the liquidity trap.
The paper presents an analysis of
the zero nominal interest rate bound using this apparatus and discusses the implications of pre-emptive
monetary easing when the macroeconomic conditions suggest that the bound may restrict future monetary
policy effectiveness.
JEL classification: A22, E32, E52
1.
Introduction
On 16 December 2008, the Federal Open Markets Committee established ‘a target range for the federal
funds rate of 0 to 1/4 percent’.
For several weeks prior to this announcement, the effecti
Less
