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Economics > General Economics

arXiv:2511.04782 (econ)
[Submitted on 6 Nov 2025]

Title:Clearing Up the Effective Lower Bound Morass

Authors:Haochun Ma, Jordan Roulleau-Pasdeloup
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Abstract:Depending on the persistence of the underlying Markov chain shock, the standard New Keynesian model predicts starkly different conclusions at the Effective Lower Bound. We clear up this morass by using a truncated Markov chain. We prove that the expectations-driven trap à la Mertens & Ravn (2014) doesn't arise as an equilibrium outcome. In addition, the equilibrium under a truncated Markov chain is guaranteed to be unique, the effect of government spending is positive on consumption and does not switch signs but may grow unbounded \textemdash a puzzle.
Subjects: General Economics (econ.GN)
Cite as: arXiv:2511.04782 [econ.GN]
  (or arXiv:2511.04782v1 [econ.GN] for this version)
  https://doi.org/10.48550/arXiv.2511.04782

Submission history

From: Jordan Roulleau-Pasdeloup [view email]
[v1] Thu, 6 Nov 2025 20:02:07 UTC (711 KB)
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