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Monetary policy effectiveness in the liquidity trap: a switching regimes approach

Author

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  • Dimitris G. Kirikos

    (Hellenic Mediterranean University, Heraklion and Hellenic Open University, Patras, Greece)

Abstract

Liquidity trap economics seems to have fared particularly well on all counts of its predictions, in the aftermath of the 2008 global financial crisis. Therefore, in this paper we evaluate formally the effectiveness of unconventional monetary policy in a liquidity trap, based on data from Japan, the USA, and the eurozone over periods of liquidity trap conditions (1994–2018 for Japan and 2009–2018 for the USA and the eurozone). Under effective unconventional policies, changes in the base money-growth regime should be associated with similar regime changes in either inflation or investment expenditure growth and the estimation of a switching regimes model allows us to test whether significant joint regime shifts occur in the data. Also, a test of liquidity trap conditions is based on a discrepancy of regime shifts between growth rates of base money and broad money, since this implies a collapse of the money multiplier. Our findings show that drastic shifts in the growth rate of the monetary base do not produce similar behavior for the inflation rate, investment expenditure growth, and broad money growth, thus pointing to liquidity trap conditions and unconventional monetary policy ineffectiveness.

Suggested Citation

  • Dimitris G. Kirikos, 2021. "Monetary policy effectiveness in the liquidity trap: a switching regimes approach," Review of Keynesian Economics, Edward Elgar Publishing, vol. 9(1), pages 139-155, January.
    • Handle: RePEc:elg:rokejn:v:9:y:2021:i:1:p139-155
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    Cited by:

    1. Kirikos, Dimitris G., 2020. "Quantitative easing impotence in the liquidity trap: Further evidence," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 151-162.

    More about this item

    Keywords

    liquidity trap; zero lower bound; Markov switching regimes; quantitative easing;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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