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Monetary Policy Switching in the Euro Area and Multiple Steady States: An Empirical Investigation

By Gilles Dufrénot and Guillaume A. Khayat

Abstract

ACL-2International audienceThis paper investigates, in the case of the euro area, the standard assumption that the liquidity trap steady state, which arises from the existence of the zero lower bound on the nominal interest rate, is locally unstable. We show that the policy function of the European Central Bank (ECB) is described by a nonlinear Taylor rule. Then, using our estimations, we show that around the liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. Finally, we find that an inflation shock is more efficient than a demand shock to escape the liquidity trap steady state

Topics: Indeterminacy, multiple steady state equilibria, Euro Area, Monetary Policy, Multiple Steady States, Nonlinear Taylor Rules, [SHS]Humanities and Social Sciences, [SHS.ECO]Humanities and Social Sciences/Economics and Finance
Publisher: 'Cambridge University Press (CUP)'
Year: 2017
DOI identifier: 10.1017/S1365100515000280
OAI identifier: oai:HAL:hal-01590000v1
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