This paper proposes a model that explains the joint occurrence of liquidity traps and jobless growth recoveries. Its key elements are downward nominal wage rigidity, a Taylor-type interest rate feedback rule, the zero lower bound on nominal interest rates, and a confidence shock. Absent a change in policy, the model predicts that low inflation and high unemployment become chronic. With capital accumulation, the model predicts, in addition, an investment slump. The paper identifies a New Fisherian effect, whereby raising the nominal interest rate to its intended target for an extended period of time can boost inflationary expectations and thereby foster employment.
"Liquidity Traps and Jobless Recoveries."
American Economic Journal: Macroeconomics,
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Interest Rates: Determination, Term Structure, and Effects
International Business Cycles