[PDF] Monetary Policy And The Liquidity Trap eBook

Author : Mr.Anton Korinek
Publisher : International Monetary Fund
Page : 49 pages
File Size : 30,69 MB
Release : 2014-07-21
Category : Business & Economics
ISBN : 1498370942

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We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' exante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.

Author : Jin Cao
Publisher : Springer Nature
Page : 412 pages
File Size : 45,38 MB
Release : 2019-12-07
Category : Business & Economics
ISBN : 3030196976

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This textbook provides an introduction to modern monetary economics for advanced undergraduates, highlighting the lessons learned from the recent financial crisis. The book presents both the core New Keynesian model and recent advances, taking into account financial frictions, and discusses recent research on an intuitive level based on simple static and two-period models, but also prepares readers for an extension to a truly dynamic analysis. Further, it offers a systematic perspective on monetary policy, covering a wide range of models to help readers gain a better understanding of controversial issues. Part I examines the long-run perspective, addressing classical monetary policy issues such as determination of the price level and interaction between monetary and fiscal policy. Part II introduces the core New Keynesian model, characterizing optimal monetary policy to stabilize short-term shocks. It discusses rules vs. discretion and the challenges arising from control errors, imperfect information and robustness issues. It also analyzes optimal control in the presence of an effective lower bound. Part III focuses on modelling financial frictions. It identifies the transmission mechanisms of monetary policy via banking and introduces models with incomplete markets, principal-agent problems, maturity mismatch and leverage cycles, to show why investors’ and intermediaries’ own stakes play a key role in lending with pro-cyclical features. In addition, it presents a tractable model for handling liquidity management and demonstrates that the need to sell assets in crisis amplifies the volatility of the real economy. Lastly, the book discusses the relation between monetary policy and financial stability, addressing systemic risk and the role of macro-prudential regulation.

Author : Paul Krugman
Publisher : W. W. Norton & Company
Page : 290 pages
File Size : 36,22 MB
Release : 2012-04-30
Category : Political Science
ISBN : 0393088871

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A New York Times best-selling call to arms from Nobel Prize–winning economist Paul Krugman. The Great Recession is more than four years old—and counting. Yet, as Paul Krugman points out in this powerful volley, "Nations rich in resources, talent, and knowledge—all the ingredients for prosperity and a decent standard of living for all—remain in a state of intense pain." How bad have things gotten? How did we get stuck in what now can only be called a depression? And above all, how do we free ourselves? Krugman pursues these questions with his characteristic lucidity and insight. He has a powerful message for anyone who has suffered over these past four years—a quick, strong recovery is just one step away, if our leaders can find the "intellectual clarity and political will" to end this depression now.

Author : Mr.Anton Korinek
Publisher : International Monetary Fund
Page : 49 pages
File Size : 45,27 MB
Release : 2014-07-21
Category : Business & Economics
ISBN : 1498356397

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We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' exante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.

Author : Gauti B. Eggertsson
Publisher :
Page : 77 pages
File Size : 24,15 MB
Release : 2003
Category : Liquidity (Economics)
ISBN :

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We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an intertemporal equilibrium model, that open-market operations, even of unconventional' types, are ineffective if they do not change expectations about the future conduct of policy; in this sense, a liquidity trap' is possible. Nonetheless, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In our model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. We also discuss ways in which other central-bank actions, while irrelevant apart from their effects on expectations, may help to make credible a central bank's commitment to its target, and consider implications for the policy options currently available for overcoming deflation in Japan

Author : Jean-François Nadeau
Publisher :
Page : 0 pages
File Size : 29,68 MB
Release : 2009
Category : Global Financial Crisis, 2008-2009
ISBN :

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In the United Kingdom, for example, the bank rate set by the Bank of England is at its lowest level since the bank was established in 1694. [...] Despite the drastic monetary measures being taken, the expected impact on the economy is slow to show itself, raising the spectre of what economists call the liquidity trap, when a combination of various economic factors produces a tendency not to spend despite low interest rates and a ready supply of money. [...] When the level of production in an economy exceeds the level attainable using the factors of production in a sustainable way,(2) there is upward pressure on production costs, which ultimately leads to price increases, and thus to inflation.(3) For example, if a business runs its machinery round the clock, it has to pay its employees overtime, the risk of machinery breakdown rises because routine m [...] It equals the difference between the nominal interest rate and the rate of inflation during the term of the investment. [...] To illustrate the latter point, Figure 1 shows changes in nominal interest rates, real interest rates and inflation in the United States from the early 1960s to the present.

Author : Mr.Olivier Jeanne
Publisher : International Monetary Fund
Page : 45 pages
File Size : 21,84 MB
Release : 2004-09-01
Category : Business & Economics
ISBN : 145185790X

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An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.

Author : Mr.Jiaqian Chen
Publisher : International Monetary Fund
Page : 66 pages
File Size : 50,16 MB
Release : 2020-06-12
Category : Business & Economics
ISBN : 1513546805

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We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.