NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bernanke's No-arbitrage Argument Revisited: Can Open Market Operations in Real Assets Eliminate the Liquidity Trap?

Gauti B. Eggertsson, Kevin Proulx

NBER Working Paper No. 22243
Issued in May 2016
NBER Program(s):Monetary Economics

We first show that, at least in theory, open market operations in real assets can be a useful tool for overcoming a liquidity trap because they change the inflation incentives of the government, and thus change private sector expectations from deflationary to inflationary. We argue that this formalizes Ben Bernanke's arbitrage argument for why a central bank can always increase nominal demand, despite the zero lower bound. We illustrate this logic in a calibrated New Keynesian model assuming the government acts under discretion. Numerical experiments suggest, however, that the needed intervention is incredibly high, creating a serious limitation of this solution to the liquidity trap. Our experiments suggest that while asset purchases can be a helpful commitment device in theory, they may need to be combined in practice with fiscal policy coordination to achieve the desired outcome.

download in pdf format
   (888 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22243

Users who downloaded this paper also downloaded* these:
Cochrane w19476 The New-Keynesian Liquidity Trap
Gorton and Tallman w22036 How Did Pre-Fed Banking Panics End?
Amador, Bianchi, Bocola, and Perri w22298 Reverse Speculative Attacks
Eggertsson, Mehrotra, and Summers w22172 Secular Stagnation in the Open Economy
Brülhart, Gruber, Krapf, and Schmidheiny w22376 Taxing Wealth: Evidence from Switzerland
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us