Money and capital in a persistent liquidity trap

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis

Journal of Monetary Economics, 2020, vol. 116, issue C, 70-87

Abstract: Using a monetary model with asset scarcity, we show that a liquidity trap caused by a persistent deleveraging shock increases real cash holdings and decreases investment and output in the medium term. This medium-term supply-side effect arises when firms face financial constraints. Policy implications differ from shorter-run analyses implied by nominal rigidities. 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. A higher government debt helps exiting the liquidity trap and reduces asset scarcity, but may hurt investment in the medium run.

Keywords: Zero lower bound; Liquidity trap; Asset scarcity; Deleveraging (search for similar items in EconPapers)
JEL-codes: E22 E40 E58 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Money and Capital in a Persistent Liquidity Trap (2018)
Working Paper: Money and Capital in a Persistent Liquidity Trap (2016)
Working Paper: Money and Capital in a Persistent Liquidity Trap (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:116:y:2020:i:c:p:70-87

DOI: 10.1016/j.jmoneco.2019.09.005

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