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  3. American Economic Journal: Macroeconomics
  4. January 2017
  5. Liquidity Traps and Jobless Recoveries

Liquidity Traps and Jobless Recoveries

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Abstract

This paper proposes a model that explains the joint occurrence of liquidity traps and jobless growth recoveries. Its key elements are downward nominal wage rigidity, a Taylor-type interest rate feedback rule, the zero lower bound on nominal interest rates, and a confidence shock. Absent a change in policy, the model predicts that low inflation and high unemployment become chronic. With capital accumulation, the model predicts, in addition, an investment slump. The paper identifies a New Fisherian effect, whereby raising the nominal interest rate to its intended target for an extended period of time can boost inflationary expectations and thereby foster employment.

Citation

Schmitt-Grohé, Stephanie, and Martín Uribe. 2017. "Liquidity Traps and Jobless Recoveries." American Economic Journal: Macroeconomics, 9 (1): 165-204. DOI: 10.1257/mac.20150220

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • F44 International Business Cycles
  • G01 Financial Crises
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