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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 16.12

Philippe Bacchetta and Kenza Benhima and Yannick Kalantzis

Money and Capital in a Persistent Liquidity Trap

June, 2016


In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price exibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-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. 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.

JEL Classification: E40, E22, E58

Keywords: Zero lower bound; liquidity trap; asset scarcity; deleveraging

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