eprintid: 28307
rev_number: 14
eprint_status: archive
userid: 3114
dir: disk0/00/02/83/07
datestamp: 2020-05-14 14:28:30
lastmod: 2020-05-19 10:50:32
status_changed: 2020-05-14 14:28:30
type: workingPaper
metadata_visibility: show
creators_name: Lustenhouwer, Joep
title: Fiscal Stimulus In Expectations-Driven Liquidity Traps
subjects: ddc-330
divisions: i-181000
keywords: bounded rationality; fiscal policy; liquidity trap; heterogeneous expectations
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.
date: 2020-05
id_scheme: DOI
id_number: 10.11588/heidok.00028307
schriftenreihe_cluster_id: sr-3
schriftenreihe_order: 0683
ppn_swb: 1698319460
own_urn: urn:nbn:de:bsz:16-heidok-283071
language: eng
bibsort: LUSTENHOUWFISCALSTIM202005
full_text_status: public
series: Discussion Paper Series / University of Heidelberg, Department of Economics
volume: 0683
place_of_pub: Heidelberg
pages: 60
citation:   Lustenhouwer, Joep  (2020) Fiscal Stimulus In Expectations-Driven Liquidity Traps.  [Working paper]     
document_url: https://archiv.ub.uni-heidelberg.de/volltextserver/28307/1/Lustenhouwer_2020_dp683.pdf