The Real Balance Effect

Peter Ireland

No 8136, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2001-02
New Economics Papers: this item is included in nep-dge and nep-mon
Note: ME
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Citations: View citations in EconPapers (18)

Published as Ireland, Peter N. “The Liquidity Trap, the Real Balance Effect, and the Friedman Rule." International Economic Review (November 2005).

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Working Paper: The Real Balance Effect (2001)
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