Money and Capital in a Persistent Liquidity Trap
September 7, 2016Macro, Trade, and Finance Seminar Series

Speaker: Philippe Bacchetta is a Professor of Economics at University of Lausanne.  More »

Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price flexibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem. 

*This is a joint event with IMF.


Last Updated: Aug 30, 2016

The Macro, Trade, and Finance Seminar Series is a weekly series hosted by the World Bank's research department. The series invites leading researchers from the fields of macroeconomics, growth, trade, international integration, and finance to present the results of their most recent research in a seminar format. The full list of seminars can be viewed here.

Last Updated: Jul 27, 2015

Event Details
  • Date: September 7, 2016
  • Location: IMF HQ1 10-713
  • Time: 12:00 – 1:30 pm
  • CONTACT: Shweta Mesipam

Other Events in the Series