Fiscal stimulus in expectations-driven liquidity traps

• Verfasst von: Lustenhouwer, Joep [VerfasserIn]
• Titel: Fiscal stimulus in expectations-driven liquidity traps
• Verf.angabe: Joep Lustenhouwer
• Verlagsort: Heidelberg
• Verlag: University of Heidelberg, Department of Economics
• E-Jahr: 2020
• Jahr: 14 May 2020
• Umfang: 1 Online-Ressource (62 Seiten)
• Illustrationen: Illustrationen
• Gesamttitel/Reihe: Discussion paper series / University of Heidelberg, Department of Economics ; no. 683
• DOI: doi:10.11588/heidok.00028307
• URN: urn:nbn:de:bsz:16-heidok-283071
• Datenträger: Online-Ressource
• Sprache: eng
• Sach-SW: bounded rationality
• Sach-SW: fiscal policy
• Sach-SW: liquidity trap
• Sach-SW: heterogeneous expectations
• Form-SW: Graue Literatur
• K10plus-PPN: 1698319460
• K10plus-PPN:
  Universitätsbibliothek
• Lokale URL UB: Zum Volltext

Abstract

I study liquidity traps in a model where agents have heterogeneous expectations and finite planning horizons. Backward-looking agents base their expectations on past observations, while forward-looking agents have fully rational expectations. Liquidity traps that are fully or partly driven by expectations can arise due to pessimism of backward-looking agents. Only when planning horizons are finite, these liquidity traps can be of longer duration without ending up in a deflationary spiral. I further find that fiscal stimulus in the form of an increase in government spending or a cut in consumption taxes can be very effective in mitigating the liquidity trap. A feedback mechanism of heterogeneous expectations causes fiscal multipliers to be the largest when the majority of agents is backward-looking but there also is a considerable fraction of agents that are forward-looking. Labor tax cuts are always deflationary and are not an effective tool in a liquidity trap.