Money,Bonds, and the Liquidity Trap |
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Authors: | LUIS ARAUJO LEO FERRARIS |
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Institution: | E-mail: araujolu@msu.edu, leo.ferraris@uniroma2.it |
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Abstract: | This paper examines a search model of money and public bonds in which coordination frictions lead to multiple, Pareto ranked equilibria. Whether money and bonds are substitutes or complements, is not a primitive of the economy, but an equilibrium outcome. There exists an equilibrium resembling a liquidity trap, in which money and bonds are perfect substitutes, interest rates are zero, and monetary policy is ineffective; and a superior equilibrium in which money and bonds are complements, interest rates are positive and monetary policy has a liquidity effect. On this view, the liquidity trap is a belief-driven phenomenon. |
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Keywords: | money public bonds monetary policy liquidity trap |
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