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Optimal Monetary Policy and Liquidity with Heterogeneous Households

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 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.
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Preprints, Working Papers, ...
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Submitted on : Thursday, December 9, 2021 - 4:12:18 AM
Last modification on : Friday, April 29, 2022 - 10:13:05 AM


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



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