Money and Capital in a Persistent Liquidity Trap

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price exibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-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. 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: E22 E40 E58 (search for similar items in EconPapers)
Pages: 41 pp.
Date: 2016-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ger, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://hec.unil.ch/attachments/deep/series/2016/16.12.pdf (application/pdf)

Related works:
Journal Article: Money and capital in a persistent liquidity trap (2020)
Working Paper: Money and Capital in a Persistent Liquidity Trap (2018)
Working Paper: Money and Capital in a Persistent Liquidity Trap (2016)
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:lau:crdeep:16.12

Access Statistics for this paper

More papers in Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie Université de Lausanne, Faculté des HEC, Département d’économie, Internef, CH-1015 Lausanne. Contact information at EDIRC.
Bibliographic data for series maintained by Christina Seld ().