There is a widespread view that inflation or inflationary expectations are the only way to overcome the zero lower bound on interest rate. This article shows that this is not true. It is shown that a tax-subsidy scheme can be used to overcome the zero lower bound on interest rate—without any inflation or inflationary expectations. A simple ‘old’ Keynesian model is used though the treatment is novel and in-depth. The article ends with a discussion that suggests that the ‘non-inflation solution’ is superior to the ‘inflation solution’ under some conditions.
JEL Classification: E31m E43, E63.
The difficulty lies, not in the new ideas, but in escaping from the old ones … . (John Maynard Keynes, 1936)
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