Liquidity Trap Prevention and Escape

Download or read book Liquidity Trap Prevention and Escape written by Junning Cai and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity traps occur when the natural nominal interest rate becomes negative. In a model with capital price dynamics explicitly considered, we find that shocks in the future can cause current and lasting liquidity traps. We propose that the central bank can prevent or fix liquidity traps by appending to its inflation-targeting monetary policy with a prioritized promise to defend a lower bound of nominal capital price.