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Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents

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Abstract

This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation or temporary binding credit constraints. This framework is motivated by recent empirical findings. A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB. The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot. Moreover, an optimal money injection does not avoid the economy being at the ZLB.
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hal-03459028 , version 1 (30-11-2021)

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Xavier Ragot. Optimal Monetary Policy in a Liquidity Trap with Heterogeneous Agents. 2017. ⟨hal-03459028⟩
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