Liquidity Traps and Large-Scale Financial Crises
Giovanni Caggiano (),
Efrem Castelnuovo (),
Antoine Parent () and
Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne
This paper estimates a nonlinear Threshold-VAR to investigate if a Keynesian liquidity trap due to a speculative motive was in place in the U.S. Great Depression and the recent Great Recession. We find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in M2 in the 1921-1940 period. This evidence, which is consistent with the Keynesian view on a liquidity trap, is shown to be state contingent. In particular, it emerges only when a speculative regime identified by high realizations of the Dow Jones index is considered. A standard linear framework is shown to be ill-suited to test the hypothesis of a Keynesian liquidity trap. An investigation performed with the same data for the period 1991-2010 confirms the presence of a liquidity trap just in the speculative regime. This last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the Divisia M2 measure of liquidity.
Keywords: Keynesian liquidity trap; threshold VAR; monetary and financial cliometrics; Great Depression; Great Recession (search for similar items in EconPapers)
JEL-codes: B22 C52 E52 N12 N22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-his, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://melbourneinstitute.unimelb.edu.au/downloads ... series/wp2016n32.pdf (application/pdf)
Working Paper: Liquidity Traps and Large-Scale Financial Crises (2018)
Journal Article: Liquidity traps and large-scale financial crises (2017)
Working Paper: Liquidity traps and large-scale financial crises (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2016n32
Access Statistics for this paper
More papers in Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Sheri Carnegie ().