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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (1532)	5/20/2003 1:44:38 AM
From: gpowell	Respond to of 4912

"Using the same theoretical framework as the previous literature, the authors demonstrate that for both flexible- and sticky-price models and for simulations of calibrated economies, an active monetary policy will generally lead to indeterminacy and multiple equilibria. Central banks that follow such a policy around a given inflation target may well lead the economy into a deflationary spiral similar to the one observed in Japan and, as some have argued, Europe." cepr.org "Since John Taylor's (1993) seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest rate feedback rules can easily lead to unexpected consequences. Specifically, we show that even if the steady state at which monetary policy is active, is locally the unique equilibrium, typically there exists an infinite number of equilibrium trajectories originating arbitrarily close to that steady state, that converge to a liquidity trap, that is, a steady state in which the nominal interest rate is near zero and inflation is possibly negative." ideas.repec.org Whether the fed uses the taylor rule or not, the taylor rule is descriptive of the way Greensspan has conducted monetary policy. One possible, perhaps inevitable, outcome of following this rule is a deflationary spiral resulting in a liquidity trap.