Template-type: ReDIF-Paper 1.0
Author-Name: Alfonso Palacio Vera
Author-Workplace-Name: Departamento de Economía Aplicada, Pública y Política. Universidad Complutense de Madrid.
Author-Workplace-Homepage: https://www.ucm.es/eapp
Title: Liquidity and growth traps: a framework for the analysis of macroeconomic policy in the 'age' of Central Banks 
Abstract: Conventional explanations of how a growing potential output generates an equi-proportional increase in aggregate demand in 
	the long run usually rely on the real balance effect. Yet this mechanism has a negligible size and an uncertain sign. We 
	present a theoretical framework for the analysis of the power of conventional monetary policy to take the economy down its 
	potential output path. We develop a simple model that predicts the behavior of the ‘neutral’ interest rate and the 
	‘pseudo-warranted’ interest rate in the wake of different types of shocks. We identify several different scenarios according to 
	whether the behavior of the ‘neutral’ real interest rate enhances or weakens the power of conventional monetary policy. 
	Likewise, we identify several regimes depending on whether a rise in the target rate of inflation in steady growth yields 
	faster or slower output growth when the ‘natural’ rate is not (fully) exogenous. In addition, we provide a formal definition of 
	the concept of the ‘growth trap’ which complements the notion of the ‘liquidity trap’. Finally, we propose a taxonomy of 
	monetary policy regimes.
Classification-JEL: E310, E490, E590
Keywords: Bancos centrales, Política macroeconómica, Neutral and warranted real interest rate, Liquidity trap, Growth trap, Inflation, 
	Monetary policy.  
Length: 57 pages 
Creation-Date: 2005 
Number: 05-02
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doctra05-02.txt
File-URL: https://eprints.ucm.es/id/eprint/6845/1/0502.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doctra:05-02