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The Non-Zero Lower Bound Lending Rate and the Liquidity Trap

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  • Khemraj, Tarron

Abstract

Most 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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File URL: http://mpra.ub.uni-muenchen.de/42030/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42030.

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Date of creation: 01 Sep 2011
Date of revision: 01 May 2012
Handle: RePEc:pra:mprapa:42030

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Related research

Keywords: liquidity trap; quantitative easing; financial friction; excess liquidity;

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  1. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
  2. Ryu‚Äźichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, 05.
  3. Kazuo Ogawa, 2007. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 241-257, 02.
  4. Charles Goodhart & Boris Hofmann, 2003. "The IS Curve and the Transmission of Monetary Policy: Is there a Puzzle?," FMG Special Papers sp150, Financial Markets Group.
  5. Yoshiyasu Ono, 2011. "The Keynesian Multiplier Effect Reconsidered," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 787-794, 06.
  6. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
  7. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
  8. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
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