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Fiscal Policy and Liquidity Traps with Heterogeneous Agents

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  • Piergallini, Alessandro

Abstract

This paper explores global dynamics in a monetary model with limited asset market participation and the zero lower bound on nominal interest rates. It is shown that a rise in government transfers to ‘non-Ricardian’ consumers financed by debt-based taxes to ‘Ricardian’ consumers is capable of escaping disinflationary paths typically convergent to a liquidity trap. Fiscal policy does not need to be unsustainable at the low inflation steady state to avoid liquidity traps, as argued in the context of the standard single representative agent setup.

Suggested Citation

  • Piergallini, Alessandro, 2017. "Fiscal Policy and Liquidity Traps with Heterogeneous Agents," MPRA Paper 88798, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:88798
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fiscal Policy; Multiple Equilibria; Global Dynamics; Liquidity Traps; Non-Ricardian Consumers.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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