NBER Working Papers and Publications
|July 1999||Liquidity Traps: How to Avoid Them and How to Escape Them|
with Willem H. Buiter: w7245
The paper considers ways of avoiding a liquidity trap and ways of getting out of one. Unless lower short nominal interest rates are associated with significantly lower interest volatility, a lower average rate of inflation, which will be associated with lower expected nominal interest rates, increases the odds that the zero nominal interest rate floor will become a binding constraint. The empirical evidence on this issue is mixed. Once in a liquidity trap, there are two means of escape. The first is to use expansionary fiscal policy. The second is to lower the zero nominal interest rate floor. This second option involves paying negative interest on government 'bearer bonds' -- coin and currency, that is 'taxing money', as advocated by Gesell. This would also reduce the likelihood of e...
Published: Reflections on Economics and Econometrics, Essays in Honour of
Martin Fase, edited by Wim F.V. Vanthoor and Joke Mooij, 2001, pp. 13-58, De
Nederlandsche Bank NV, Amsterdam.