DeFiPP Research Seminar-Charles De Beauffort (National Bank of Belgium)

Government debt and expectations-driven liquidity traps

Abstract:

The presence of an effective lower bound on the nominal interest rate creates a risk that expectations of low inflation become entrenched. When this happens, distortionary taxation and expansionary fiscal policies may result in a large accumulation of debt that spurs inflation when the lower bound ceases to bind. The corresponding increase in expected real interest rates then further depresses consumption and output. In light of this outcome, the welfare-maximising strategy in an expectations-driven liquidity trap is to downsize the government by concurrently cutting taxes and spending. This policy achieves the twin objective of stimulating the economy while containing the debt accumulation

Contact : Romain Houssa - romain.houssa@unamur.be
Télecharger : vCal