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Money and Capital in a Persistent Liquidity Trap

Philippe Bacchetta (), Kenza Benhima () and Yannick Kalantzis ()

No 11369, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price flexibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem.

Keywords: Asset scarcity; Deleveraging; liquidity trap; zero lower bound (search for similar items in EconPapers)
JEL-codes: E22 E40 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ger, nep-mac and nep-mon
Date: 2016-07
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