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Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents

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  • 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
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    References listed on IDEAS

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    16. Ivan Werning, 2011. "Managing a Liquidity Trap: Monetary and Fiscal Policy," 2011 Meeting Papers 1435, Society for Economic Dynamics.
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    Cited by:

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

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    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

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