Liquidity Deflation and Liquidity Trap under Flexible Prices
نویسنده
چکیده
I discuss some simple microfoundations for Liquidity Deflation, a concept put forward in Calvo (2016 a and b), which can give rise to liquidity trap conditions under perfectly flexible prices. Unlike in Keynes (1936), this is a Supply Side Liquidity Trap. Moreover, modeling the policy interest rate as the rate of return on money-like instruments à la Calvo and Végh (1995), denoted by i!, I show that i! may fail to generate full equilibrium if it is subject to a lower bound like the ZLB. However, even if lower bounds are not binding, a low i! may be counterproductive because it may impair the liquidity of the money-like instrument.
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