The prevailing models of liquidity traps suggest that a deflationary trap is a stable steady state in a multiple equilibria model. These models implicitly assume that the central bank accelerates the process of disinflation by following a Taylor rule even though it knows the positive...

This paper characterizes general properties of an economy that experiences deflation by investigating the long-run government budget constraint. A sufficient condition for deflation in an economy under a balanced budget is that the nominal interest rate is below the output growth rate. With a...

This paper explores the link between fiscal-monetary policy interaction and deflation. The key feature of this paper is that the central bank's balance sheet is separated from the government's budget constraint. As a result, government bonds are held entirely by households, and money is supplied...