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Liquidity trap and secular stagnation

Author

Listed:
  • Yannick Kalantzis

    (Banque de France)

  • Kenza Benhima

    (University of Lausanne (HEC))

  • Philippe Bacchetta

    (University of Lausanne)

Abstract

In this paper we analyze the link between the ZLB and slow growth in a model with heterogeneous agents and explicit money demand. While the model is neoclassical with small shocks, a large deleveraging shock in the spirit of Eggertsson and Krugman (2012) has permanent effects even with flexible prices. It affects supply rather than demand and implies a long-term decrease in potential output and an increase in cash holding. The basic reason is that in a liquidity trap, saving is allocated to cash rather than physical capital. With short-term price stickiness, monetary policy in the form of an expansion in money supply is effective in reducing unemployment in the short-run, but not in affecting the long term output level. An increase in debt may help exiting the ZLB, but it may lower the capital stock because of higher interest rates.

Suggested Citation

  • Yannick Kalantzis & Kenza Benhima & Philippe Bacchetta, 2015. "Liquidity trap and secular stagnation," 2015 Meeting Papers 661, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:661
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    References listed on IDEAS

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    1. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    2. Pierpaolo Benigno & Gauti B. Eggertsson & Federica Romei, 2020. "Dynamic Debt Deleveraging and Optimal Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 310-350, April.
    3. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    4. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    5. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
    6. Philippe Bacchetta & Kenza Benhima, 2015. "The Demand For Liquid Assets, Corporate Saving, And International Capital Flows," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1101-1135, December.
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    Cited by:

    1. Grace Taylor & Rod Tyers, 2017. "Secular Stagnation: Determinants and Consequences for Australia," The Economic Record, The Economic Society of Australia, vol. 93(303), pages 615-650, December.

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