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Liquidity Deflation and Liquidity Trap under Flexible Prices: Some Microfoundations and Implications / Guillermo A. Calvo.
- Format:
- Book
- Author/Creator:
- Calvo, Guillermo A.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26277.
- NBER working paper series no. w26277
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Liquidity Deflation and Liquidity Trap under Flexible Prices
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2019.
- Summary:
- The paper discusses simple microfoundations for Liquidity Deflation (Calvo 2016, Chapter 2), which gives rise to liquidity trap under perfectly flexible prices/wages. Unlike Keynes (1936), this is a Supply Side Liquidity Trap, SSLT, not resolved by a fall in prices /wages, or massive helicopter increase in liquid government liabilities. However, escaping SSLT could be achieved by low policy interest rates on money (unless ZLB holds) and, more interestingly, higher inflation driven by administered prices/wages. Moreover, contrary to (Friedman 1969), under Liquidity Deflation the Optimal Quantity of Money does not call for liquidity satiation, and may be dangerously close to SSLT.
- Notes:
- Print version record
- September 2019.
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