A key result of a recent literature that focuses on the global consequences of Taylor-type interest rate feedback rules is that such rules, in combination with the zero-bound on nominal interest rates, can lead to unintended liquidity traps. An immediate question posed by this result is whether...

Once the zero-bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the...