Money, Bonds, and the Liquidity Trap

Luis Araujo () and Leo Ferraris

Journal of Money, Credit and Banking, 2020, vol. 52, issue 7, 1853-1867

Abstract: This paper examines a search model of money and public bonds in which coordination frictions lead to multiple, Pareto ranked equilibria. Whether money and bonds are substitutes or complements, is not a primitive of the economy, but an equilibrium outcome. There exists an equilibrium resembling a liquidity trap, in which money and bonds are perfect substitutes, interest rates are zero, and monetary policy is ineffective; and a superior equilibrium in which money and bonds are complements, interest rates are positive and monetary policy has a liquidity effect. On this view, the liquidity trap is a belief‐driven phenomenon.

Date: 2020
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https://doi.org/10.1111/jmcb.12697

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:7:p:1853-1867

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