IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Liquidity and growth traps: a framework for the analysis of macroeconomic policy in the 'age' of Central Banks

  • Alfonso Palacio-Vera

    (Universidad Complutense de Madrid.)

Registered author(s):

    Conventional explanations of how a growing potential output generates an equi-proportional increase in aggregate demand in the long run usually rely on the real balance effect. Yet this mechanism has a negligible size and an uncertain sign. We present a theoretical framework for the analysis of the power of conventional monetary policy to take the economy down its potential output path. We develop a simple model that predicts the behavior of the ‘neutral’ interest rate and the ‘pseudo-warranted’ interest rate in the wake of different types of shocks. We identify several different scenarios according to whether the behavior of the ‘neutral’ real interest rate enhances or weakens the power of conventional monetary policy. Likewise, we identify several regimes depending on whether a rise in the target rate of inflation in steady growth yields faster or slower output growth when the ‘natural’ rate is not (fully) exogenous. In addition, we provide a formal definition of the concept of the ‘growth trap’ which complements the notion of the ‘liquidity trap’. Finally, we propose a taxonomy of monetary policy regimes.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://eprints.ucm.es/6845/1/0502.pdf
    Download Restriction: no

    Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales with number 05-02.

    as
    in new window

    Length: 57 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:ucm:doctra:05-02
    Contact details of provider: Phone: 913942604
    Fax: 913942531
    Web page: http://economicasyempresariales.ucm.es/
    Email:


    More information through EDIRC

    Order Information: Postal: Facultad de Ciencias Económicas y Empresariales. Campus de Somosaguas, 28223 - POZUELO DE ALARCÓN (MADRID)
    Web: https://economicasyempresariales.ucm.es/working-papers-ccee Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Kohn, Meir, 1981. "A Loanable Funds Theory of Unemployment and Monetary Disequilibrium," American Economic Review, American Economic Association, vol. 71(5), pages 859-79, December.
    2. Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 131-202 National Bureau of Economic Research, Inc.
    3. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    4. Brouwer, Erik & Kleinknecht, Alfred, 1999. "Keynes-Plus? Effective Demand and Changes in Firm-Level R&D: An Empirical Note," Cambridge Journal of Economics, Oxford University Press, vol. 23(3), pages 385-91, May.
    5. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    6. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
    7. repec:cup:cbooks:9780521365963 is not listed on IDEAS
    8. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
    9. Jeffrey Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers 94-1, Federal Reserve Bank of Boston.
    10. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-66, November.
    11. Buiter, Willem H., 2003. "Deflation: Prevention and Cure," CEPR Discussion Papers 3869, C.E.P.R. Discussion Papers.
    12. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    13. Lindbeck, Assar, 1992. "Macroeconomic theory and the labor market," European Economic Review, Elsevier, vol. 36(2-3), pages 209-235, April.
    14. Michael Mussa, 2000. "Summary panel: reflections on monetary policy at low inflation," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1100-1106.
    15. Geroski, P A & Walters, C F, 1995. "Innovative Activity over the Business Cycle," Economic Journal, Royal Economic Society, vol. 105(431), pages 916-28, July.
    16. Caskey, John & Fazzari, Steven M, 1987. "Aggregate Demand Contractions with Nominal Debt Commitments: Is Wage Flexibility Stabilizing?," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 583-97, October.
    17. Engelbert Stockhammer, 2004. "Financialisation and the slowdown of accumulation," Cambridge Journal of Economics, Oxford University Press, vol. 28(5), pages 719-741, September.
    18. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
    19. Sims, Christopher A, 2000. "Comment on Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 967-72, November.
    20. Blinder, Alan S, 2000. "Monetary Policy at the Zero Lower Bound: Balancing the Risks: Summary Panel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1093-99, November.
    21. Alan S. Blinder, 2000. "Summary panel: monetary policy at the zero lower bound: balancing the risks," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1093-1099.
    22. Mussa, Michael, 2000. "Reflections on Monetary Policy at Low Inflation: Summary Panel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1100-1106, November.
    23. Pollin, Robert, 1985. "Stability and Instability in the Debt-Income Relationship," American Economic Review, American Economic Association, vol. 75(2), pages 344-50, May.
    24. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
    25. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    26. Assar Lindbeck, 1993. "Unemployment and Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121751, June.
    27. J. Bradford DeLong, 1999. "Should We Fear Deflation?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 225-252.
    28. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ucm:doctra:05-02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Águeda González Abad)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.