Expectations and Policies in Deflationary Recessions

In this paper we use a non-tatonnement dynamic macroeconomic model to study the role of inventories,\r\nexpectations and wages in the business cycle. Following a restrictive\r\nmonetary shock, by amplifying spillover effects inventories may imply that\r\nthe economy converges to a deflationary locally stable Keynesian\r\nunderemployment state. The model is applied to evaluate economic policies\r\nlike quantitative easing as well as the effectiveness of holding\r\ninflationary expectations to recover to full employment. If inflationary\r\nexpectations are not sufficient, imposing downward rigidity of nominal wages\r\nhelps to exit from the recession.