A Neoclassical Theory of Liquidity Traps / Sebastian Di Tella.

Format:

Book

Author/Creator:

Di Tella, Sebastian.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24205.

NBER working paper series no. w24205

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

This paper provides an equilibrium theory of liquidity traps and the real effects of money. Money provides a safe store of value that prevents interest rates from falling enough during downturns, and the economy enters a persistent slump with depressed investment. This is an equilibrium outcome--prices are flexible, markets clear, and inflation is on target--but it's not efficient. Investment is too high during booms and too low during liquidity traps. Although money has large real effects, monetary policy is ineffective--the zero lower bound is not binding, money is superneutral, and Ricardian equivalence holds. The optimal allocation requires the Friedman rule and a tax/subsidy on capital.

Notes:

Print version record

January 2018.