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Monetary Policy under a Liquidity Trap: Simulation Evidence for the Euro Area

By A. Dieppe and Peter McAdam


In this paper, we analyze the conduct of monetary policy under a zero nominal interest-rate bound (hereafter ZIB) in a model economy of the euro area, namely that of the Area Wide Model. The aggregate euro-area economy is modeled to have relatively sluggish adjustment properties and a private sector with mainly backward-looking expectations. For a given ZIB benchmark, we consider variations in the monetary-policy reaction function to minimize the macro-economic consequences of such a deflationary regime. We rank the effectiveness of these remedial policies using a number of metrics and relate our results to features and properties of the model economy

Topics: H
Year: 2006
DOI identifier: 10.1016/j.jjie.2006.05.002
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