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Negative interest rate policy in a permanent liquidity trap

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  • Murota, Ryu-ichiro

Abstract

Using a dynamic general equilibrium model, this paper theoretically analyzes a negative interest rate policy in a permanent liquidity trap. If the natural nominal interest rate is above the lower bound set by the presence of vault cash held by commercial banks, a reduction in the nominal rate of interest on excess bank reserves can get an economy out of the permanent liquidity trap. In contrast, if the natural nominal interest rate is below the lower bound, then it cannot do so, but instead a rise in the rate of tax on vault cash is useful for doing so.

Suggested Citation

  • Murota, Ryu-ichiro, 2019. "Negative interest rate policy in a permanent liquidity trap," MPRA Paper 93498, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93498
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    File URL: https://mpra.ub.uni-muenchen.de/93498/1/MPRA_paper_93498.pdf
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    More about this item

    Keywords

    aggregate demand; liquidity trap; negative nominal interest rate; unemployment;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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