ECO365H1 Lecture Notes - Lecture 11: Liquidity Trap, Smax, Substitute Good
Document Summary
Trade off between money and bonds becomes irrelevant. We are seeing negative rates for first time in recent rates. Don"t understand their effects, how negative can rates go. Negative rates may make sense after accounting for cost of storage. If there is lower bound on i, then there must be upper bound on s (smax) Except s does not increase at equilibrium because already at smax. Is now even harder to get out of liquidity trap. Permanent fiscal policy will have full crowding out effect. Tricky: after fiscal shock over, dd will shift back. Hope is that increase in g is enough to stimulate private sector to maintain increased ad. Need to be big enough for private sector to regain confidence. Fixed exchange rate at higher than smax (credible devaluation) Had been fighting inflation for a while, but needed to change expectations to manage permanent monetary policy, which required inflation. Eco365 page 2 monetary policy, which required inflation.
