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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.
Dokumententyp: | Arbeitspapier |
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Name der Reihe: | Discussion Paper Series / University of Heidelberg, Department of Economics |
Band: | 0683 |
Ort der Veröffentlichung: | Heidelberg |
Erstellungsdatum: | 14 Mai 2020 14:28 |
Erscheinungsjahr: | Mai 2020 |
Seitenanzahl: | 60 |
Institute/Einrichtungen: | Fakultät für Wirtschafts- und Sozialwissenschaften > Alfred-Weber Institut |
DDC-Sachgruppe: | 330 Wirtschaft |
Freie Schlagwörter: | bounded rationality; fiscal policy; liquidity trap; heterogeneous expectations |
Schriftenreihe: | Discussion Paper Series / University of Heidelberg, Department of Economics |