INFLATION TARGETS AND THE LIQUIDITY TRAP

The presence of a lower bound of zero on nominal interest rates has important implications for the conduct of optimal monetary policy.Standard rational expectations models can have alternative steady states as well as non-unique laws of motion, i.e. there can be possible sunspot equilibria.Such complications can be ruled out under a number of alternative assumptions.In this paper we analyse the relevance of the zero lower bound for alternative levels of inßation in a standard Neo-Keynesian model, where stability is assured by assuming that Þscal policy turns expansionary at the zero lower bound.