Liquidity Deflation and Liquidity Trap Under Flexible Prices

Download or read book Liquidity Deflation and Liquidity Trap Under Flexible Prices written by Guillermo A. Calvo and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper discusses simple microfoundations for Liquidity Deflation (Calvo 2016, Chapter 2), which gives rise to liquidity trap under perfectly flexible prices/wages. Unlike Keynes (1936), this is a Supply Side Liquidity Trap, SSLT, not resolved by a fall in prices /wages, or massive helicopter increase in liquid government liabilities. However, escaping SSLT could be achieved by low policy interest rates on money (unless ZLB holds) and, more interestingly, higher inflation driven by administered prices/wages. Moreover, contrary to (Friedman 1969), under Liquidity Deflation the Optimal Quantity of Money does not call for liquidity satiation, and may be dangerously close to SSLT.