Negative interest rate policy in a permanent liquidity trap

Murota, Ryu-ichiro (2019): Negative interest rate policy in a permanent liquidity trap.

Abstract

Using a dynamic general equilibrium model, this paper theoretically analyzes a negative interest rate policy in a permanent liquidity trap. If the natural nominal interest rate is above the lower bound set by the presence of vault cash held by commercial banks, a reduction in the nominal rate of interest on excess bank reserves can get an economy out of the permanent liquidity trap. In contrast, if the natural nominal interest rate is below the lower bound, then it cannot do so, but instead a rise in the rate of tax on vault cash is useful for doing so.

• Item Type: MPRA Paper
• Language: English
• Keywords: aggregate demand, liquidity trap, negative nominal interest rate, unemployment
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Abo-Zaid, S., Garin, J. (2016): Optimal monetary policy and imperfect financial markets: A case for negative nominal interest rates?, Economic Inquiry, 54, pp. 215-22.

Agenor, P.-R., Alper, K. (2012): Monetary shocks and central bank liquidity with credit market imperfections, Oxford Economic Papers, 64, pp. 563-591.

Akerlof, G. A. (1982): Labor contracts as partial gift exchange, Quarterly Journal of Economics, 97, pp. 543-569.

Angrick, S., Nemoto, N. (2017): Central banking below zero: The implementation of negative interest rates in Europe and Japan, Asia Europe Journal, 15, pp. 417-443.

Bech, M., Malkhozov, A. (2016): How have central banks implemented negative policy rates?, BIS Quarterly Review, March, pp. 31-44.

Benigno, G., Fornaro, L. (2018): Stagnation traps, Review of Economic Studies, 85, pp. 1425-1470.

Bewley, T. F. (1999): Why Wages Don't Fall during a Recession, Harvard University Press, Cambridge, Mass., and London, England.

Blinder, A. S., Choi, D. H. (1990): A shred of evidence on theories of wage stickiness, Quarterly Journal of Economics, 105, pp. 1003-1015.

Buiter, W. H. (2010): Negative nominal interest rates: Three ways to overcome the zero lower bound, North American Journal of Economics and Finance, 20, pp. 213-238.

Buiter, W. H., Panigirtzoglou, N. (2003): Overcoming the zero bound on nominal interest rates with negative interest on currency: Gesell's solution, Economic Journal, 113, pp. 723-746.

Campbell, C. M., Kamlani, K. S. (1997): The reasons for wage rigidity: Evidence from a survey of firms, Quarterly Journal of Economics, 112, pp. 759-789.

Collard, F., de la Croix, D. (2000): Gift exchange and the business cycle: The fair wage strikes back, Review of Economic Dynamics, 3, pp. 166-193.

Danthine, J.-P., Kurmann, A. (2004): Fair wages in a New Keynesian model of the business cycle, Review of Economic Dynamics, 7, pp. 107-142.

Eggertsson, G. B., Juelsrud, R. E., Summers, L. H., Wold, E. G. (2019): Negative nominal interest rates and the bank lending channel, NBER Working Paper, No. 25416.

Eggertsson, G. B., Mehrotra, N. R. (2014): A model of secular stagnation, NBER Working Paper, No. 20574.

Eggertsson, G. B., Mehrotra, N. R., Singh, S. R., Summers, L. H. (2016): A contagious malady? Open economy dimensions of secular stagnation, IMF Economic Review, 64, pp. 581-634.

Fukao, M. (2005): The effects of `Gesell' (currency) taxes in promoting Japan's economic recovery, International Economics and Economic Policy, 2, pp. 173-188.

Goodfriend, M. (2000): Overcoming the zero bound on interest rate policy, Journal of Money, Credit, and Banking, 32, pp. 1007-1035.

Illing, G., Ono, Y., Schlegl, M. (2018): Credit booms, debt overhang and secular stagnation, European Economic Review, 108, pp. 78-104.

Jones, B., Asaftei, G., Wang, L. (2004): Welfare cost of inflation in a general equilibrium model with currency and interest-bearing deposits, Macroeconomic Dynamics, 8, pp. 493-517.

Kahneman, D., Knetsch, J. L., Thaler, R. (1986): Fairness as a constraint on profit seeking: Entitlements in the market, American Economic Review, 76, pp. 728-741.

Kawaguchi, D., Ohtake, F. (2007): Testing the morale theory of nominal wage rigidity, Industrial and Labor Relations Review, 61, pp. 59-74.

Mees, H., Franses, P. H. (2014): Are individuals in China prone to money illusion?, Journal of Behavioral and Experimental Economics, 51, pp. 38-46.

Michaillat, P., Saez, E. (2014): An economical business-cycle model, NBER Working Paper, No. 19777.

Michau, J.-B. (2018): Secular stagnation: Theory and remedies, Journal of Economic Theory, 176, pp. 552-618.

Murota, R. (2016): Effects of an employment subsidy in long-run stagnation, Kindai Working Papers in Economics, No. E-37.

Murota, R. (2018): Aggregate demand deficiency, labor unions, and long-run stagnation, Metroeconomica, 69, pp. 868-888.

Murota, R., Ono, Y. (2012): Zero nominal interest rates, unemployment, excess reserves and deflation in a liquidity trap, Metroeconomica, 63, pp. 335-357.

Ono, Y. (2018): Macroeconomic interdependence between a stagnant and a fully employed country, Japanese Economic Review, 69, pp. 450-477.

Ono, Y., Ishida, J. (2014): On persistent demand shortages: A behavioural approach, Japanese Economic Review, 65, pp. 42-69.

Ono, Y., Yamada, K. (2018): Difference or ratio: Implications of status preference on stagnation, Australian Economic Papers, 57, pp. 346-362.

Raurich, X., Sorolla, V. (2014): Growth, unemployment and wage inertia, Journal of Macroeconomics, 40, pp. 42-59.

Rognlie, M. (2016): What lower bound? Monetary policy with negative interest rates, Working Paper.

Romer, D. (1985): Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis, Journal of Monetary Economics, 16, pp. 175-194.

Shafir, E., Diamond, P., Tversky, A. (1997): Money illusion, Quarterly Journal of Economics, 112, pp. 341-374.

Vaona, A. (2013): The most beautiful variations on fair wages and the Phillips curve, Journal of Money, Credit and Banking, 45, pp. 1069-1084.