Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297496 
Authors: 
Year of Publication: 
2019
Citation: 
[Journal:] Contemporary Economics [ISSN:] 2300-8814 [Volume:] 13 [Issue:] 4 [Year:] 2019 [Pages:] 446-470
Publisher: 
University of Finance and Management in Warsaw, Faculty of Management and Finance, Warsaw
Abstract: 
Keynes emphasized a specific situation in which the liquidity preference becomes absolute, leading to monetary policy ineffectiveness when nominal interest approaches the zero-bound rate. This situation was termed a liquidity trap (LT) by Robertson and was popularized by the Hicks- Hansen framework (IS-LM). Early macroeconomic textbooks characterized the LT as the Keynesian case against the classical one. The "lowflation" environment experienced in the USA and Europe again brought the LT to the forefront. The quantitative easing monetary policy was introduced in Japan and better applied in the USA and EMU as a solution to overcome the LT. The macroeconomic mainstream contends that the LT is essentially a money demand problem, whereas we propose another interpretation; the current situation should be interpreted as a "banking problem" that impedes the transformation of the monetary base into money supply. To prove our thesis, we study the behavior of the USA money multiplier and the income velocity of money by comparing an earlier period with the 2007-2008 crisis period. Using a VAR and a VECM model, we compare the normal situation of monetary policy efficiency with the situation of LT monetary policy inefficiency. We prove that the LT focus should not be placed on the demand for money but rather on the behavior of the money supply - more specifically, on banks' behavior leading to the transformation of the monetary base into the money supply.
Subjects: 
Liquidity trap
Money supply
Monetary base multiplier
ARIMA
VAR and VECM models
JEL: 
E12
E3
E4
E51
E6
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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