Safe asset shortages can expose the economy to liquidity traps. The nature of these traps is determined by the … cyclicality of the bond premium. Selfful filling liquidity traps are associated with a counter-cyclical bond premium. Small … liquidity traps arise under a pro-cyclical bond premium and government debt is expansionary. In the data, we find evidence of a …

, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation …-indexed bonds (TIPS) and inflation swaps. Using US data, we show that the level of liquidity affects TIPS, whereas swap yields … include a liquidity risk premium. We also allow for liquidity effects in nominal bonds. These results are based on a model …

lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real … rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However … or spending. The price dynamics are driven solely by the liquidity premium on the debt …