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Money and Capital in a Persistent Liquidity Trap
1 : University of Lausanne (HEC - Lausanne)
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 dier 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.
