HALT: Heterogeneous-Agent Liquidity Traps

Florin Bilbiie

No 16625, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a tractable heterogeneous-agent New-Keynesian model, I study analytically liquidity traps. Heterogeneity determines whether liquidity traps are confidence-driven or fundamental, excess-saving driven, where the latter can be triggered by shocks to inequality or income risk. Heterogeneity amplifies liquidity-trap recessions (without relying on deep deflations), fiscal multipliers, and forward-guidance power when income inequality and risk are countercyclical. Dampening occurs instead when inequality and risk are procyclical, ruling out confidence-driven traps, neo-Fisherian effects, and the forward guidance puzzle. Optimal monetary policy implies that forward-guidance duration is optimally shortened by the same inequality motives that amplify its power.

Keywords: Heterogeneity; Inequality; Tractable hank; Liquidity traps; Neo-fisher; Multipliers; Forward guidance; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E31 E40 E44 E50 E52 E58 E60 E62 (search for similar items in EconPapers)
Date: 2021-10
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