Discussion paper

DP16625 HALT: Heterogeneous-Agent Liquidity Traps

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.


Bilbiie, F (2021), ‘DP16625 HALT: Heterogeneous-Agent Liquidity Traps‘, CEPR Discussion Paper No. 16625. CEPR Press, Paris & London. https://cepr.org/publications/dp16625