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The Non-Zero Lower Bound Lending Rate and the Liquidity Trap

  • Khemraj, Tarron
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    Most studies of the liquidity trap emphasize the zero bound benchmark policy rate. This paper integrates a non-zero lower bound lending rate and the traditional zero bound policy rate in a dynamic structural macroeconomic model that takes into consideration aggregate bank liquidity preference as a financial friction. The approach allows for analyzing the dynamic effects of quantitative easing and an interest rate policy. Once the non-zero lower limit is reached, increasing the benchmark policy rate marginally can have a positive effect on output. Expanding quantitative easing at the non-zero lower limit results in a negative effect on output. Increasing marginally the zero bound policy rate is better at stimulating inflation than quantitative easing. However, excessive tightening in a normal regime would result in the opposite effect.

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    File URL: http://mpra.ub.uni-muenchen.de/42030/1/MPRA_paper_42030.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42030.

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    Date of creation: 01 Sep 2011
    Date of revision: 01 May 2012
    Handle: RePEc:pra:mprapa:42030
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    1. Ryu‚Äźichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, 05.
    2. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
    3. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
    4. Yoshiyasu Ono, 2009. "The Keynesian Multiplier Effect Reconsidered," ISER Discussion Paper 0730, Institute of Social and Economic Research, Osaka University.
    5. Goodhart, Charles A. E. & Hofmann, Boris, 2003. "The IS curve and the transmission of monetary policy: Is there a puzzle?," ZEI Working Papers B 13-2003, ZEI - Center for European Integration Studies, University of Bonn.
    6. Kazuo Ogawa, 2007. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 241-257, 02.
    7. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
    8. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
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