IDEAS home Printed from https://ideas.repec.org/a/adr/anecst/y2023i149p97-124.html
   My bibliography  Save this article

Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents

Author

Listed:
  • Xavier Ragot

Abstract

This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation and temporary binding credit constraints. This framework is motivated by recent empirical findings. A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB. The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot. Moreover, an optimal money injection does not avoid the economy being at the ZLB.

Suggested Citation

  • Xavier Ragot, 2023. "Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents," Annals of Economics and Statistics, GENES, issue 149, pages 97-124.
    • Handle: RePEc:adr:anecst:y:2023:i:149:p:97-124
    DOI: 10.2307/48718081
    as

    Download full text from publisher

    File URL: https://www.jstor.org/stable/48718081
    Download Restriction: no
    File URL: https://libkey.io/10.2307/48718081?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:hal:pseose:halshs-01313771 is not listed on IDEAS
    2. Sterk, Vincent & Tenreyro, Silvana, 2018. "The transmission of monetary policy through redistributions and durable purchases," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 124-137.
    3. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    4. Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 126(590), pages 135-164, February.
    5. Veronica Guerrieri & Guido Lorenzoni, 2017. "Credit Crises, Precautionary Savings, and the Liquidity Trap," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1427-1467.
    6. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
    7. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2009. "Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 911-967.
    8. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-1504, September.
    9. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
    10. Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
    11. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," PSE-Ecole d'économie de Paris (Postprint) halshs-00754461, HAL.
    12. Ivan Werning, 2011. "Managing a Liquidity Trap: Monetary and Fiscal Policy," 2011 Meeting Papers 1435, Society for Economic Dynamics.
    13. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Post-Print halshs-00754461, HAL.
    14. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
    15. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 77-153.
    16. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 295-316, April.
    17. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    18. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 295-316, April.
    19. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
    20. repec:hal:spmain:info:hdl:2441/54k1p7hdq38odb1k39k1rdm8di is not listed on IDEAS
    21. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    22. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    23. repec:hal:spmain:info:hdl:2441/3ao9avev669hj9hvol1l0lr6im is not listed on IDEAS
    24. repec:hal:spmain:info:hdl:2441/4vm8e5vhjr99cb1ekr86bivlk0 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano Maria Corbellini, 2022. "Optimal monetary and transfer policy in a liquidity trap," Diskussionsschriften dp2216, Universitaet Bern, Departement Volkswirtschaft.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hal:spmain:info:hdl:2441/46oc18254n98cbqvcekaq9f0ng is not listed on IDEAS
    2. repec:spo:wpecon:info:hdl:2441/46oc18254n98cbqvcekaq9f0ng is not listed on IDEAS
    3. repec:spo:wpmain:info:hdl:2441/46oc18254n98cbqvcekaq9f0ng is not listed on IDEAS
    4. repec:hal:wpspec:info:hdl:2441/46oc18254n98cbqvcekaq9f0ng is not listed on IDEAS
    5. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    6. repec:hal:spmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    7. repec:spo:wpmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    8. repec:hal:wpspec:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    9. repec:spo:wpecon:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    10. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    11. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2020. "The Welfare Cost of Inflation Risk under Imperfect Insurance," Annals of Economics and Statistics, GENES, issue 138, pages 1-20.
    12. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2015. "The Welfare Cost of Inflation Risk Under Imperfect Insurance," Working Papers hal-01169656, HAL.
    13. Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
    14. repec:hal:spmain:info:hdl:2441/4331vs7k488ou947ueeh5laj5l is not listed on IDEAS
    15. Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2016. "The Welfare Cost of Inflation Risk Under Imperfect Insurance," Sciences Po Economics Discussion Papers 2016-08, Sciences Po Departement of Economics.
    16. repec:hal:wpspec:info:hdl:2441/4331vs7k488ou947ueeh5laj5l is not listed on IDEAS
    17. Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," Working Papers hal-03444395, HAL.
    18. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    19. repec:spo:wpmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    20. repec:hal:spmain:info:hdl:2441/4vm8e5vhjr99cb1ekr86bivlk0 is not listed on IDEAS
    21. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.
    22. repec:hal:wpspec:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    23. repec:spo:wpmain:info:hdl:2441/4vm8e5vhjr99cb1ekr86bivlk0 is not listed on IDEAS
    24. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance & Xavier Ragot, 2015. "The redistributive effects of QE," SciencePo Working papers Main hal-03459824, HAL.
    25. repec:hal:spmain:info:hdl:2441/562ju27dra9dnp6j4nvhq0tgfq is not listed on IDEAS
    26. repec:spo:wpecon:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    27. repec:hal:spmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    28. repec:hal:spmain:info:hdl:2441/16fo245k6a8q1pss5r3giac4m2 is not listed on IDEAS
    29. repec:hal:spmain:info:hdl:2441/1j0a1p4ifa98paomt4907gu4qo is not listed on IDEAS
    30. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2020. "The Welfare Cost of Inflation Risk under Imperfect Insurance," Annals of Economics and Statistics, GENES, issue 138, pages 1-20.
    31. Bilbiie, Florin, 2018. "Monetary Policy and Heterogeneity: An Analytical Framework," CEPR Discussion Papers 12601, C.E.P.R. Discussion Papers.
    32. Benjamin Pugsley & Hannah Rubinton, 2019. "Inequality in the Welfare Costs of Disinflation," Working Papers 2020-021, Federal Reserve Bank of St. Louis, revised 23 Sep 2021.
    33. repec:spo:wpmain:info:hdl:2441/1j0a1p4ifa98paomt4907gu4qo is not listed on IDEAS
    34. Lizarazo, Sandra & Da-Rocha, Jose-Maria, 2011. "Optimal monetary policy and default," MPRA Paper 31931, University Library of Munich, Germany.
    35. Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2012. "Monetary Shocks Under Incomplete Markets," SciencePo Working papers Main hal-01169658, HAL.
    36. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    37. repec:spo:wpmain:info:hdl:2441/16fo245k6a8q1pss5r3giac4m2 is not listed on IDEAS
    38. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance & Xavier Ragot, 2015. "The redistributive effects of QE," Working Papers hal-03459824, HAL.
    39. Francisco J. Buera & Juan Pablo Nicolini, 2020. "Liquidity Traps and Monetary Policy: Managing a Credit Crunch," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 110-138, July.
    40. Enes Sunel, 2018. "Welfare Consequences of Gradual Disinflation in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 705-755, June.
    41. Crump, Richard K. & Eusepi, Stefano & Tambalotti, Andrea & Topa, Giorgio, 2022. "Subjective intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 118-133.

    More about this item

    Keywords

    Liquidity Trap; Zero Lower Bound; Heterogeneous Agents; Optimal Policy.;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adr:anecst:y:2023:i:149:p:97-124. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Secretariat General or Laurent Linnemer (email available below). General contact details of provider: https://edirc.repec.org/data/ensaefr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.