TY  - GEN
CY  - Heidelberg
EP  - 60
UR  - https://archiv.ub.uni-heidelberg.de/volltextserver/28307/
ID  - heidok28307
Y1  - 2020/05//
AV  - public
TI  - Fiscal Stimulus In Expectations-Driven Liquidity Traps
N2  - 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.
KW  - bounded rationality; fiscal policy; liquidity trap; heterogeneous expectations
T3  - Discussion Paper Series / University of Heidelberg, Department of Economics
A1  - Lustenhouwer, Joep
ER  -