Liquidity Trap Prevention and Escape: A Simple Proposition

Junning Cai

Macroeconomics from University Library of Munich, Germany

Abstract: Liquidity traps occur when the natural nominal interest rate becomes negative. In a model with capital price dynamics explicitly considered, we find that shocks in the future can cause current and lasting liquidity traps. We propose that the central bank can prevent or fix liquidity traps by appending to its inflation-targeting monetary policy with a prioritized promise to defend a lower bound of nominal capital price. (JEL E31, E43, E44, E52, E58, E61, G12) Keywords: Liquidity traps; Zero interest bound; Asset Prices; Lower capital price bound

Keywords: Liquidity traps; Zero interest bound; Asset Prices; Lower capital price bound (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 E52 E58 E61 G12 (search for similar items in EconPapers)
Date: 2004-02-28
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0402033

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