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The Liquidity Trap, The Real Balance Effect, And The Friedman Rule

  • Peter N. Ireland

This article studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates using a model with population growth that nests, as a special case, the conventional specification in which there is a single infinitely lived representative agent. The article shows that with a growing population, monetary policy has distributional consequences that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2005.00367.x
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 46 (2005)
Issue (Month): 4 (November)
Pages: 1271-1301

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Handle: RePEc:ier:iecrev:v:46:y:2005:i:4:p:1271-1301
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  19. Freeman, Scott, 1985. "Transactions Costs and the Optimal Quantity of Money," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 146-57, February.
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