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Money and capital in a persistent liquidity trap

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  • Bacchetta, Philippe
  • Benhima, Kenza
  • Kalantzis, Yannick

Abstract

Using a monetary model with asset scarcity, we show that a liquidity trap caused by a persistent deleveraging shock increases real cash holdings and decreases investment and output in the medium term. This medium-term supply-side effect arises when firms face financial constraints. Policy implications differ from shorter-run analyses implied by nominal rigidities. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem. A higher government debt helps exiting the liquidity trap and reduces asset scarcity, but may hurt investment in the medium run.

Suggested Citation

  • Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick, 2020. "Money and capital in a persistent liquidity trap," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 70-87.
  • Handle: RePEc:eee:moneco:v:116:y:2020:i:c:p:70-87
    DOI: 10.1016/j.jmoneco.2019.09.005
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    Cited by:

    1. Lukas Altermatt, 2017. "Inside money, investment, and unconventional monetary policy," ECON - Working Papers 247, Department of Economics - University of Zurich, revised Jul 2019.
    2. Maruyama, Yuuki, 2020. "A Model of Monetary Transmission Mechanism," SocArXiv hm9jn, Center for Open Science.
    3. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    4. Andrea Caggese & Ander Perez, 2017. "Capital Misallocation and Secular Stagnation," Finance and Economics Discussion Series 2017-009, Board of Governors of the Federal Reserve System (U.S.).
    5. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 135(3), pages 1493-1566.
    6. Jacopo Bonchi, 2020. "Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates," Working Papers 3/20, Sapienza University of Rome, DISS.
    7. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2016. "Monetary policy for a bubbly world," Economics Working Papers 1533, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2020.
    8. Maruyama, Yuuki, 2020. "Monopolistic Competition, Precautionary Savings, Coordination Failure," SocArXiv t836n, Center for Open Science.
    9. Philippe Bacchetta, 2018. "The sovereign money initiative in Switzerland: an economic assessment," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-16, December.

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    More about this item

    Keywords

    Zero lower bound; Liquidity trap; Asset scarcity; Deleveraging;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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