Self-Fulfilling Recessions at the Zero Lower Bound

  title={Self-Fulfilling Recessions at the Zero Lower Bound},
  author={Charles Frederick Brendon and Matthias Paustian and Tony Yates},
Abstract We highlight an overlooked source of equilibrium multiplicity in monetary economies subject to a zero bound on nominal interest rates. In environments with sufficient endogenous propagation, depressed contemporary economic conditions must directly lower expectations of future output and inflation. A current recession followed by gradual convergence back to steady state may then be an equilibrium outcome, without any exogenous impulse. We present this mechanism heuristically in partial… CONTINUE READING