Wealth effects, the Taylor rule and the liquidity trap

This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations la Yaari-Blanchard-Weil. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, in the presence of wealth effects, the occurrence of liquidity traps is not avoided when the central bank implements a Taylor-type interest-rate feedback rule.