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This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial behavior on the part of the...
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-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the … common practice of using linearized models to calculate fiscal multipliers in long-lived liquidity traps. …
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