The Combination of US Economy Policies under the Liquidity Trap Crisis

This paper examines what policy combinations the US economy should adopt to escape a possible liquidity trap under the impact of the COVID-19. We used the method of argumentation and drew on the previous related theories for comprehensive analysis, including fiscal policy, unconventional open market operations, expectations management and multinational policy coordination, to produce policy recommendations.

What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices

This paper analyzes the effects of the lower bound for interest rates on the distributions of inflation and interest rates. In a New Keynesian model with a lower bound, two equilibria emerge: policy is mostly unconstrained in the “target equilibrium,” whereas policy is mostly constrained in the “liquidity trap equilibrium.” Using options data on interest rates and inflation, we find forecast densities consistent with the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. The lower bound has a sizable effect on the distribution of interest rates, but its impact on inflation is relatively modest. (JEL E12, E23, E31, E43, E52, G13)

The Influence of Information Diffusion on Interbank Risk Contagion

In this paper, the stylized features of incomplete and asymmetric information in the interbank market leading to banks’ precautionary behaviors are introduced. Based on banks’ stylized behavioral rules, the influencing mechanism of information diffusion on interbank risk contagion is analyzed, and how the existence of information diffusion and banks’ information-obtaining ability influence the interbank risk contagion is verified through computational simulations. The results show that information diffusion can significantly accelerate the process of and magnify the extent and probability of interbank risk contagion, and improving banks’ information-obtaining ability could lower the speed and extent of the interbank risk contagion. This paper also finds and explains some special phenomena of rollover risk contagion when information diffusion exists: the saltatory risk contagion, the circular liquidity trap, and the risk discovery of information diffusion.

Five Common Errors about Deflation

Deflation is generally considered as an evil that must be prevented. Economists as well are focusing on the question of deflation prevention. This paper examines the reasons for why deflation is considered as bad and refutes in this context five common errors concerning deflation: That deflation leads to an unfair redistribution, that deflation induces an decrease in production, that deflation induced price instability leads to chaos, that it is the cause of mass unemployment and can put the economy in a disastrous liquidity trap. It is concluded that the standard analysis of deflation must be revised. Key words: deflation. Clasificación JEL: E31 Resumen: Comúnmente se considera la deflación como algo malo que hay que evitar. También los economistas se esfuerzan en estudiar cómo se puede prevenir la deflación. Este artículo analiza las razones por las cuales se considera la deflación como algo malo y refuta en este contexto cinco errores muy difundidos sobre la deflación: que la deflación causa una redistribución arbitraria, que la deflación lleva a una reducción de la producción, que una inestabilidad de precios causada por la deflación produce caos, que es la causa de paro masivo y que puede poner a la economía en una trampa de liquidez desastrosa. Se concluye que, ante estos errores, hay que revisar el análisis estándar de la deflación. Palabras clave: deflación.

Macroeconomic policy in a pandemic era: What does the IS-LM model show?

This paper examines how the COVID-19 pandemic will affect macroeconomic policy, setting the dynamics of interest rates in the short to medium term for developed countries and developing (transition) economies. The macroeconomic model of general equilibrium (IS-LM) was chosen as a simple tool for analysis allowing us to identify mechanisms for translating the effects of the pandemic and the corresponding government policy on interest rates. We emphasize the fundamental differences of the situation in the countries that were already in a liquidity trap at the beginning of the pandemic and in the economies still far from this state. The results of the analysis demonstrate the limited effectiveness of monetary policy to restore economic activity in both groups of the countries and the need for fiscal stimulus to reduce uncertainty (or lower the slope of the model curves). Under these conditions, the capacity of debt financing of additional public expenditures, the functioning of the financial sector and ensuring macroprudential stability pose serious problems for economic policy.

ECONOMIC POLICY TO OVERCOME STAGNATION AFTER THE FINANCIAL CRISIS

The article considers the downward spiral of deflation, its causes and consequences. The paper discusses the compression of aggregate demand and the subsequent recession. The study discloses the content of the liquidity trap created by the behavior of borrowers. The author traces the connection between the events of the “lost decades” in Japan and the stagnation of production in leading Western countries after the global financial crisis. In both cases, the large-scale use of fiscal and monetary incentives did not cause a sharp rise in business activity. The paper concludes that the operation of the market mechanism is blocked by budget and monetary policies. Obstacles to entrepreneurial activity and energy lead to the loss of necessary information generated by market agents. This circumstance prolongs the stagnation of the economy.