This paper revisits the paradox of flexibility, i.e., the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterize monetary...

Standard New Keynesian models deliver puzzling results at the effective lower bound of short-term interest rates: greater price flexibility amplifies the fall in output in response to adverse demand shocks; labour tax cuts are contractionary; the multipliers of wasteful government spending are...

Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In...

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...