Liquidity Traps with Global Taylor Rules ∗

  title={Liquidity Traps with Global Taylor Rules ∗},
  author={Stephanie Schmitt-Groh{\'e}},
A key result of a recent literature that focuses on the global consequences of Taylortype interest rate feedback rules is that such rules in combination with the zero bound on nominal interest rates can lead to unintended liquidity traps. An immediate question posed by this result is whether the government could avoid liquidity traps by ignoring the zero bound, that is, by threatening to set the nominal interest rate at a negative value should the inflation rate fall below a certain threshold… CONTINUE READING