Standard monetary policy rules don’t apply in liquidity traps: Dallas Fed

federal-reserve

A Dallas Federal Reserve paper published on Thursday says standard monetary policy, in some cases, may fail to counter demand shocks and that fiscal policy may be needed to avert falling into a liquidity trap.

The paper's authors, David Cook and Michael Devereux, explore the optimal policy response to a demand shock when interest rates are already at the zero bound. The authors note that while under normal monetary policy, a fall in demand will reduce domestic real interest rates and lead to a

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