Does the Liquidity Trap Exist?

42 Pages Posted: 15 Apr 2020

See all articles by Stéphane Lhuissier

Stéphane Lhuissier

Banque de France

Benoît Mojon

Bank for International Settlements (BIS)

Juan Rubio Ramírez

Emory University; Foundation for Applied Economic Research (FEDEA); Federal Reserve Banks - Federal Reserve Bank of Atlanta; BBVA Research

Multiple version iconThere are 2 versions of this paper

Date Written: April 8, 2020

Abstract

The liquidity trap is synonymous with ineffective monetary policy. The common wisdom is that, as the short-term interest rate nears its effective lower bound, monetary policy cannot do much to stimulate the economy. However, central banks have resorted to alternative instruments, such as QE, credit easing and forward guidance. Using state-of- the-art estimates of the effects of monetary policy, we show that monetary easing stimulates output and inflation, also during the period when short-term interest rates are near their lower bound. These results are consistent across the United States, the euro area and Japan.

Keywords: liquidity trap, effective lower bound, monetary transmission

JEL Classification: E32, E44, E52

Suggested Citation

Lhuissier, Stéphane and Mojon, Benoît and Rubio Ramírez, Juan, Does the Liquidity Trap Exist? (April 8, 2020). BIS Working Paper No. 855, Available at SSRN: https://ssrn.com/abstract=3571439

Stéphane Lhuissier (Contact Author)

Banque de France ( email )

Paris
France

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Juan Rubio Ramírez

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Foundation for Applied Economic Research (FEDEA)

Jorge Juan 46
Madrid, 28001
Spain

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

BBVA Research

2200 Post Oak Blvd
Houston, TX 77056
United States

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