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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:

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    2. Lukas Altermatt, 2017. "Inside money, investment, and unconventional monetary policy," ECON - Working Papers 247, Department of Economics - University of Zurich, revised Jul 2019.
    3. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    4. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2021. "Monetary Policy for a Bubbly World [Money and Capital in a Persistent Liquidity Trap]," Review of Economic Studies, Oxford University Press, vol. 88(3), pages 1418-1456.
    5. Maruyama, Yuuki, 2020. "Monopolistic Competition, Precautionary Savings, Coordination Failure," SocArXiv t836n, Center for Open Science.
    6. Ander Perez-Orive & Andrea Caggese, 2017. "Capital Misallocation and Secular Stagnation," 2017 Meeting Papers 382, Society for Economic Dynamics.
    7. 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.
    8. 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.
    9. Jacopo Bonchi, . "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    10. 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.
    11. Maruyama, Yuuki, 2020. "A Model of Monetary Transmission Mechanism," SocArXiv hm9jn, Center for Open Science.
    12. Jacopo Bonchi, . "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

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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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