This paper develops a stock-flow consistent model that explicitly integrates the role of liquidity preference and perceived uncertainty into the decision-making process of households, firms, and commercial banks. Emphasis is placed on (1) the link between the precautionary motive and the asset...

Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central...

This paper reframes the standard liquidity trap model by capturing the costly feedback loop between idiosyncratic risk and aggregate demand at the zero lower bound. I first show that a liquidity trap can result from excess demand for precautionary savings in times of high uncertainty. The model...

When the economy is in a liquidity trap and households have a precautionary motive to save against unemployment risk, adverse demand shocks cause severe deflationary spirals and output contractions. In this context, we study the implications of optimal monetary policy, which consists of keeping...

When the economy is in a liquidity trap and households have a precautionary motive to save against unemployment risk, adverse demand shocks cause severe deflationary spirals and output contractions. In this context, we study the implications of optimal monetary policy, which consists of keeping...

Inflation-targeting central banks have only imperfect knowledge about the effect of policy decisions on inflation. An important source of uncertainty is the relationship between inflation and unemployment. This paper studies the optimal monetary policy in the presence of uncertainty about the...