Wealth Effects, the Taylor Rule and the Liquidity Trap

Piergallini AlessandroAnnicchiarico BarbaraMarini Giancarlo
CEIS Research Paper
This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, the operation of wealth effects does not avoid the occurrence of liquidity traps when the central bank implements a Taylor-type interest-rate feedback rule.
Number: 103
Keywords: Wealth Effects, Taylor Rules, Liquidity Traps.
JEL codes: E31, E52
Date: Monday, May 21, 2007
Revision Date: Monday, May 21, 2007