Helicopter Drops and Liquidity Traps

Manuel Amador and Javier Bianchi

No 31046, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: During a liquidity trap, increases in the money supply have no real effects, as the nominal interest rate has reached its lower bound. We propose a theory of how helicopter drops of money can be effective during a liquidity trap. We develop a New Keynesian monetary model where the fiscal and monetary authorities are separated, and the latter faces balance sheet constraints. If the monetary authority can commit, helicopter drops are unnecessary in a liquidity trap, even under balance sheet constraints. However, we show that helicopter drops can help stabilize the economy when the monetary authority lacks commitment.

JEL-codes: E31 E52 E58 E61 E63 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-des, nep-mac and nep-mon
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Working Paper: Helicopter Drops and Liquidity Traps (2023)
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