Published:
Cambridge, Mass: National Bureau of Economic Research, August 2017
Published in:NBER working paper series ; no. w23725
Extent:
1 Online-Ressource
Language:
English
DOI:
10.3386/w23725
Identifier:
Reproduction note:
Hardcopy version available to institutional subscribers
Origination:
Footnote:
Mode of access: World Wide Web
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Description:
The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank's ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation