Discussion Paper Details

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Title: HALT: Heterogeneous-Agent Liquidity Traps

Author(s): Florin Ovidiu Bilbiie

Publication Date: October 2021

Keyword(s): forward guidance, Heterogeneity, Inequality, liquidity traps, multipliers, neo-Fisher, Optimal monetary policy and tractable HANK

Programme Area(s): Monetary Economics and Fluctuations

Abstract: In a tractable heterogeneous-agent New-Keynesian model, I study analytically liquidity traps. Heterogeneity determines whether liquidity traps are confidence-driven or fundamental, excess-saving driven, where the latter can be triggered by shocks to inequality or income risk. Heterogeneity amplifies liquidity-trap recessions (without relying on deep deflations), fiscal multipliers, and forward-guidance power when income inequality and risk are countercyclical. Dampening occurs instead when inequality and risk are procyclical, ruling out confidence-driven traps, neo-Fisherian effects, and the forward guidance puzzle. Optimal monetary policy implies that forward-guidance duration is optimally shortened by the same inequality motives that amplify its power.

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Bibliographic Reference

Bilbiie, F. 2021. 'HALT: Heterogeneous-Agent Liquidity Traps'. London, Centre for Economic Policy Research.