Theoretical physics

Monetary policy

Engineering

Inflation (cosmology)

Liquidity risk

Real interest rate

Constraint (computer-aided design)

Economics

Market economy

Deflation

Market liquidity

Mechanical engineering

Keynesian economics

Physics

Politics

Political science

Monetary economics

Zero lower bound

Nominal interest rate

Welfare

Conservatism

Liquidity trap

Liquidity crisis

Journal of Monetary Economics

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.

Conservatism and liquidity traps