Publication

This paper examines global dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lover bound. The authors find that under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome the authors recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation.