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Money and Capital in a Persistent Liquidity Trap

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  • Philippe Bacchetta
  • Yannick Kalantzis
Abstract
In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity. We show that a liquidity trap may lead to an increase in real cash holdings and be associated with a decline in output in the medium term. This medium-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 implied by nominal rigidities. 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.

Suggested Citation

  • Philippe Bacchetta & Yannick Kalantzis, 2018. "Money and Capital in a Persistent Liquidity Trap," Working papers 703, Banque de France.
    • Handle: RePEc:bfr:banfra:703
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    Cited by:

    1. Caggese, Andrea & Pérez-Orive, Ander, 2022. "How stimulative are low real interest rates for intangible capital?," European Economic Review, Elsevier, vol. 142(C).
    2. Lukas Altermatt, 2022. "Inside Money, Investment, And Unconventional Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1527-1560, November.
    3. Sushant Acharya & Keshav Dogra, 2022. "The Side Effects of Safe Asset Creation," Journal of the European Economic Association, European Economic Association, vol. 20(2), pages 581-625.
    4. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2021. "Monetary Policy for a Bubbly World [Money and Capital in a Persistent Liquidity Trap]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1418-1456.
    5. Maruyama, Yuuki, 2020. "Monopolistic Competition, Precautionary Savings, Coordination Failure," SocArXiv t836n, Center for Open Science.
    6. Ander Perez-Orive & Andrea Caggese, 2017. "Capital Misallocation and Secular Stagnation," 2017 Meeting Papers 382, Society for Economic Dynamics.
    7. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1493-1566.
    8. Philippe Bacchetta, 2018. "The sovereign money initiative in Switzerland: an economic assessment," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-16, December.
    9. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.
    10. Jacopo Bonchi, 2020. "Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates," Working Papers 3/20, Sapienza University of Rome, DISS.
    11. Maruyama, Yuuki, 2020. "A Model of Monetary Transmission Mechanism," SocArXiv hm9jn, Center for Open Science.
    12. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.

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    More about this item

    Keywords

    Zero lower bound; liquidity trap; asset scarcity; deleveraging.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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