Working Paper: CEPR ID: DP16625
Authors: Florin Ovidiu Bilbiie
Abstract: In a tractable heterogeneous-agent New-Keynesian model, I study analytically liquidity traps. Heterogeneity determines whether liquidity traps are confidence-driven or fundamental, excess-saving driven, where the latter can be triggered by shocks to inequality or income risk. Heterogeneity amplifies liquidity-trap recessions (without relying on deep deflations), fiscal multipliers, and forward-guidance power when income inequality and risk are countercyclical. Dampening occurs instead when inequality and risk are procyclical, ruling out confidence-driven traps, neo-Fisherian effects, and the forward guidance puzzle. Optimal monetary policy implies that forward-guidance duration is optimally shortened by the same inequality motives that amplify its power.
Keywords: heterogeneity; inequality; tractable HANK; liquidity traps; neofisher; multipliers; forward guidance; optimal monetary policy
JEL Codes: E21; E31; E40; E44; E50; E52; E58; E60; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excess saving triggered by shocks to inequality or income risk (E21) | liquidity traps (E41) |
| income inequality and income risk are countercyclical (D31) | liquidity traps are amplified (E44) |
| liquidity traps are less likely to occur when inequality and risk are procyclical (F65) | confidence-driven traps are ruled out (D83) |
| cyclical behavior of inequality (D31) | operational effectiveness of monetary policy (E52) |
| inequality motives that amplify effectiveness (D63) | duration of forward guidance should be shortened (E60) |