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Money and Capital in a Persistent Liquidity Trap

Philippe Bacchetta () and Yannick Kalantzis ()

Working papers from Banque de France

Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity. We show that a liquidity trap may lead to an increase in real cash holdings and be associated with a decline in output in the medium term. This medium-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 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.

Keywords: Zero lower bound; liquidity trap; asset scarcity; deleveraging. (search for similar items in EconPapers)
JEL-codes: E40 E22 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2018
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Related works:
Working Paper: Money and Capital in a Persistent Liquidity Trap (2016) Downloads
Working Paper: Money and Capital in a Persistent Liquidity Trap (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:703

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