Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents

Xavier Ragot

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Abstract: This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation and temporary binding credit constraints. This framework is motivated by recent empirical findings. A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB. The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot. Moreover, an optimal money injection does not avoid the economy being at the ZLB.

Keywords: liquidity trap; zero lower bound; heterogeneous agents; optimal policy (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03922385v1
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Published in Annals of Economics and Statistics, 2023, 149, pp.97-124. ⟨10.2307/48718081⟩

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Related works:
Journal Article: Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents (2023)
Working Paper: Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents (2023)
Working Paper: Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents (2017)
Working Paper: Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents (2017)
Working Paper: Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03922385

DOI: 10.2307/48718081

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