Physics

Monetary policy

Internal medicine

Macroeconomics

Labour economics

Real interest rate

Economics

Keynesian economics

Interest rate

Liquidity crisis

Market liquidity

Inflation (cosmology)

Wage

Zero lower bound

Unemployment

Taylor rule

Shock (circulatory)

Central bank

Theoretical physics

Monetary economics

Medicine

Nominal interest rate

Liquidity trap

American Economic Journal Macroeconomics

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. (JEL E24, E31, E32, E43, E52, F44, G01)

Liquidity Traps and Jobless Recoveries