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ERIC Number: EJ1029606
Record Type: Journal
Publication Date: 2014
Pages: 20
Abstractor: As Provided
Reference Count: 10
ISSN: ISSN-0022-0485
A Simple Treatment of the Liquidity Trap for Intermediate Macroeconomics Courses
Buttet, Sebastien; Roy, Udayan
Journal of Economic Education, v45 n1 p36-55 2014
Several leading undergraduate intermediate macroeconomics textbooks now include a simple reduced-form New Keynesian model of short-run dynamics (alongside the IS-LM model). Unfortunately, there is no accompanying description of how the zero lower bound on nominal interest rates affects the model. In this article, the authors show how the aforementioned model can easily be modified to teach undergraduate students about the significance of the zero lower bound for economic performance and policy. This acquires additional significance because economies such as the United States and Japan have been close to the zero lower bound since 2008 and 1995, respectively. The authors show that when the zero lower bound is introduced, an additional long-run equilibrium exists. This equilibrium is unstable and can lead to a deflationary spiral.
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Publication Type: Journal Articles; Reports - Descriptive
Education Level: Higher Education; Postsecondary Education
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: N/A