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Scarcity of Safe Assets, Inflation, and the Policy Trap

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  • Andolfatto, David

    (Federal Reserve Bank of St. Louis)

  • Williamson, Stephen D.

    (Federal Reserve Bank of St. Louis)

Abstract

We construct a model in which all consolidated government debt is used in transactions, with money being more widely acceptable. When asset market constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal interest rate. The model reveals some novel perils of Taylor rules.

Suggested Citation

  • Andolfatto, David & Williamson, Stephen D., 2015. "Scarcity of Safe Assets, Inflation, and the Policy Trap," Working Papers 2015-2, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2015-002
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    References listed on IDEAS

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    Cited by:

    1. Piazza, Roberto, 2016. "Self-fulfilling deflations," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 18-40.
    2. Michael Bordo & Robert N McCauley, 2017. "Triffin: dilemma or myth?," BIS Working Papers 684, Bank for International Settlements.
    3. Duarte, Fernando M., 2016. "How to escape a liquidity trap with interest rate rules," Staff Reports 776, Federal Reserve Bank of New York, revised 01 Dec 2016.
    4. Williamson, Stephen D., 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis.
    5. Stephen D. Williamson, 2016. "Current Federal Reserve Policy under the Lens of Economic History: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 922-934, September.
    6. Herrenbrueck, Lucas & Geromichalos, Athanasios, 2017. "A tractable model of indirect asset liquidity," Journal of Economic Theory, Elsevier, vol. 168(C), pages 252-260.
    7. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    8. Mathieu Boullot, 2017. "Secular Stagnation, Liquidity Trap and Rational Asset Price Bubbles," Working Papers halshs-01295012, HAL.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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