EconPapers    
Economics at your fingertips  
 

Liquidity traps: how to avoid them and how to escape them

Willem Buiter and Nikolaos Panigirtzoglou

Bank of England working papers from Bank of England

Abstract: An economy is in a liquidity trap when monetary policy cannot influence either real or nominal variables of interest. A necessary condition for this is that the short nominal interest rate is constrained by its lower bound, typically zero. The paper develops a small analytical model to show how an economy can get into a liquidity trap, how it can avoid getting into one and how it can get out. The empirical likelihood of the UK economy hitting the zero nominal rate bound is considered by investigating the relationship between the level of the short nominal interest rate and its volatility. The empirical evidence on this issue is mixed. To reduce the risk of falling into a liquidity trap, the authorities have two options. The first is to raise the inflation target. The second is to lower the zero nominal interest rate floor. This second option involves paying negative interest on government 'bearer bonds' - coin and currency - ie 'taxing money', as advocated by Gesell. Once in a liquidity trap, there are two means of escape. The first is to use expansionary fiscal policy. The second is, again, to lower the zero nominal interest rate floor. There are likely to be significant shoe leather costs associated with any scheme to tax currency.

Date: 2000-04
New Economics Papers: this item is included in nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.bankofengland.co.uk/archive/Documents/h ... apers/2000/wp111.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp111.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp111.pdf)

Related works:
Working Paper: Liquidity Traps: How to Avoid Them and How to Escape Them (1999) Downloads
Working Paper: Liquidity Traps: How to Avoid Them and How to Escape Them (1999) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:111

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team (webmaster@bankofengland.co.uk).

 
Page updated 2025-03-22
Handle: RePEc:boe:boeewp:111