THE LIQUIDITY TRAP AND PERSISTENT UNEMPLOYMENT WITH DYNAMIC OPTIMIZING AGENTS: EMPIRICAL EVIDENCE
Kazuo Ogawa () and
The Japanese Economic Review, 2004, vol. 55, issue 4, 355-371
Standard money‐in‐utility dynamic models assume satiable liquidity preference, and thereby prove the existence of a full‐employment steady state. In the same framework, it is known that under insatiable liquidity or wealth preference there is a case where a full‐employment steady state does not exist. A liquidity trap then arises and unemployment persists in the steady state. Using both parametric and non‐parametric methods, this paper empirically finds that insatiable liquidity/wealth preference is better supported. Thus, without assuming any permanent distortion, we can analyse an effective demand shortage in a dynamic optimization framework.
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