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MONETARY POLICY SWITCHING IN THE EURO AREA AND MULTIPLE STEADY STATES: AN EMPIRICAL INVESTIGATION

Published online by Cambridge University Press:  30 June 2016

Gilles Dufrénot  and
Guillaume A. Khayat
Gilles Dufrénot
Affiliation:
Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS, CEPII, and Banque deFrance
Guillaume A. Khayat*
Affiliation:
Aix-Marseille University (Aix-Marseille School of Economics), and CNRS and EHESS
*
Address correspondence to: Anwar Khayat, GREQAM, Centre de la vieille charité, 2 Rue de la charité 13002 Marseille, France; e-mail: khayat.ga@gmail.com.
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Abstract

This 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.

Keywords

Monetary PolicyIndeterminacyNonlinear Taylor RulesMultiple Steady StatesEuro Area
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Special Issue 5: Recent Topics in Computational Macroeconomics , July 2017 , pp. 1175 - 1188
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

This paper was presented at the third ISCEF Conference (Paris, April 10–12, 2014, www.iscef.com). We thank the participants for their comments that helped improving the initial version of the paper. We also thank two anonymous referees for their comments. Any remaining errors are ours.

References

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