Liquidity Trap Prevention and Escape: A Simple Proposition

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

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Year of publication:	2004-02-29
Authors:	Cai, Junning
Institutions:	EconWPA
Subject:	Liquidity traps \| Zero interest bound \| Asset Prices \| Lower capital price bound

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Extent:	application/pdf
Series:	Macroeconomics.
Type of publication:	Book / Working Paper
Notes:	Type of Document - pdf
Classification:	E31 - Price Level; Inflation; Deflation ; E43 - Determination of Interest Rates; Term Structure Interest Rates ; E44 - Financial Markets and the Macroeconomy ; E52 - Monetary Policy (Targets, Instruments, and Effects) ; E58 - Central Banks and Their Policies ; E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination ; G12 - Asset Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005561118