The Non-Zero Lower Bound Lending Rate and the Liquidity Trap
AbstractMost studies of the liquidity trap emphasize the zero bound benchmark policy rate. This paper integrates a non-zero lower bound lending rate and the traditional zero bound policy rate in a dynamic structural macroeconomic model that takes into consideration aggregate bank liquidity preference as a financial friction. The approach allows for analyzing the dynamic effects of quantitative easing and an interest rate policy. Once the non-zero lower limit is reached, increasing the benchmark policy rate marginally can have a positive effect on output. Expanding quantitative easing at the non-zero lower limit results in a negative effect on output. Increasing marginally the zero bound policy rate is better at stimulating inflation than quantitative easing. However, excessive tightening in a normal regime would result in the opposite effect.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 42030.
Date of creation: 01 Sep 2011
Date of revision: 01 May 2012
liquidity trap; quantitative easing; financial friction; excess liquidity;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E00 - Macroeconomics and Monetary Economics - - General - - - General
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
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