The Liquidity Trap: Limits for Monetary Policy at the Effective Lower Bound

John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero lower bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now is that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.

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Robust Monetary Policy Under Uncertainty About the Lower Bound

The B E Journal of Macroeconomics ◽

10.1515/bejm-2019-0077 ◽

2020 ◽

Vol 0 (0) ◽

Author(s):

Peter Tillmann

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Central Bank ◽

Interest Rates ◽

Central Banks ◽

Worst Case ◽

Liquidity Trap ◽

Nominal Interest Rates ◽

True Location ◽

Discretionary Monetary Policy

AbstractCentral banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary in the period before the liquidity trap.

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Liquidity Trap: Limits for Monetary Policy at the Effective Lower Bound

Springer Texts in Business and Economics - Instructor's Manual for Money: Theory and Practice ◽

10.1007/978-3-030-23618-2_7 ◽

2019 ◽

pp. 151-151

Author(s):

Jin Cao ◽

Gerhard Illing

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Liquidity Trap

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Transmission mechanism of the Federal Reserve System’s monetary policy in the conditions of zero bound on nominal interest rates

Equilibrium ◽

10.12775/equil.2016.034 ◽

2016 ◽

Vol 11 (4) ◽

pp. 751 ◽

Cited By ~ 1

Author(s):

Dominika Brózda

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Federal Reserve ◽

Global Financial Crisis ◽

Transmission Mechanism ◽

Zero Lower Bound ◽

Liquidity Trap ◽

Scientific Discussion ◽

Nominal Interest Rates

The experience of Japan from the 90s of the twentieth century and the recent global financial crisis has shown that the zero lower bound problem has ceased to be a theoretical curiosity and became the subject of intense scientific discussion. This issue is closely linked with John Maynard Keynes’s liquidity trap. The phenomenon of the zero lower bound is very controversial. Not all economists agree that it may restrict the effectiveness of the central bank’s actions. The aim of the article is to present the views of economists on this transmission mechanism of monetary policy under the zero lower bound. The paper also attempts to evaluate the effectiveness of the Federal Reserve System’s monetary policy at zero nominal interest rates.

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Journal of the History of Economic Thought Preprints - READING KEYNES AT THE ZERO LOWER BOUND: THE GREAT DEPRESSION, THE LIQUIDITY TRAP, AND UNCONVENTIONAL POLICY

10.31235/osf.io/vzykd ◽

2018 ◽

Author(s):

Richard Sutch

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Great Depression ◽

Economic Thought ◽

Zero Lower Bound ◽

Liquidity Trap ◽

The Great Depression ◽

Nominal Interest Rates ◽

History Of

John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero-lower-bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.

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The Costs of Macroprudential Deleveraging in a Liquidity Trap

IMF Working Papers ◽

10.5089/9781513546803.001 ◽

2020 ◽

Vol 20 (89) ◽

Author(s):

Jiaqian Chen ◽

Daria Finocchiaro ◽

Jesper Lindé ◽

Karl Walentin

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Transaction Costs ◽

New Keynesian ◽

Short Term ◽

Liquidity Trap ◽

Nominal Interest Rates ◽

Model Features

We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.

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