The Real Balance Effect
AbstractThis paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8136.
Date of creation: Feb 2001
Date of revision:
Publication status: published as Ireland, Peter N. “The Liquidity Trap, the Real Balance Effect, and the Friedman Rule." International Economic Review (November 2005).
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Other versions of this item:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-02-27 (All new papers)
- NEP-DGE-2001-02-27 (Dynamic General Equilibrium)
- NEP-MON-2001-02-27 (Monetary Economics)
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