title: Fiscal Stimulus In Expectations-Driven Liquidity Traps
creator: Lustenhouwer, Joep
subject: ddc-330
subject: 330 Economics
description: 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.
date: 2020-05
type: Working paper
type: info:eu-repo/semantics/workingPaper
type: NonPeerReviewed
format: application/pdf
identifier: https://archiv.ub.uni-heidelberg.de/volltextserverhttps://archiv.ub.uni-heidelberg.de/volltextserver/28307/1/Lustenhouwer_2020_dp683.pdf
identifier: DOI:10.11588/heidok.00028307
identifier: urn:nbn:de:bsz:16-heidok-283071
identifier:   Lustenhouwer, Joep  (2020) Fiscal Stimulus In Expectations-Driven Liquidity Traps.  [Working paper]     
relation: https://archiv.ub.uni-heidelberg.de/volltextserver/28307/
rights: info:eu-repo/semantics/openAccess
rights: http://archiv.ub.uni-heidelberg.de/volltextserver/help/license_urhg.html
language: eng