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Money and Capital in a Persistent Liquidity Trap

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  • Philippe Bacchetta
  • Yannick Kalantzis

Abstract

In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity. We show that a liquidity trap may lead to an increase in real cash holdings and be associated with a decline in output in the medium term. This medium-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. 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.

Suggested Citation

  • Philippe Bacchetta & Yannick Kalantzis, 2018. "Money and Capital in a Persistent Liquidity Trap," Working papers 703, Banque de France.
  • Handle: RePEc:bfr:banfra:703
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Lukas Altermatt, 2017. "Inside money, investment, and unconventional monetary policy," ECON - Working Papers 247, Department of Economics - University of Zurich, revised Jul 2019.
    5. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    6. 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.), revised 17 Jan 2017.

    More about this item

    Keywords

    Zero lower bound; liquidity trap; asset scarcity; deleveraging.;

    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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