Optimal Monetary Policy and Liquidity with Heterogeneous Households

Florin Bilbiie (1, 2, 3, 4) , Xavier Ragot (5, 6)

1 PSE - Paris School of Economics
2 CES - Centre d'économie de la Sorbonne
3 HEC Paris - Recherche - Hors Laboratoire
4 CEPR - Center for Economic Policy Research
5 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
6 ECON - Département d'économie (Sciences Po)

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 fric- tions, such as limited participation or temporary binding credit constraints. This framework is moti- vated 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 opera- tions 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.

Keywords: Liquidity trap; Zero lower bound; Heterogeneous agents; Optimal policy

Domains: Economics and Finance

Florin Bilbiie, Xavier Ragot. Optimal Monetary Policy and Liquidity with Heterogeneous Households. 2017. ⟨hal-03471839⟩