DP16625 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, tractable HANK
JEL(s): E21, E31, E40, E44, E50, E52, E58, E60, E62
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16625

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.