TY  - JOUR
AU  - Ireland,Peter N.
TI  - The Real Balance Effect
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8136
PY  - 2001
Y2  - February 2001
UR  - http://www.nber.org/papers/w8136
L1  - http://www.nber.org/papers/w8136.pdf
N1  - Author contact info:
Peter N. Ireland
Boston College
Department of Economics
140 Commonwealth Ave.
Chestnut Hill, MA 02467-3859
Tel: 617/552-3687
Fax: 617/552-2308
E-Mail: irelandp@bc.edu
AB  - This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin.  When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero.  Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.
ER  -