Minneapolis Fed paper challenges New Keynesian ‘liquidity trap'
New model challenges dominant view of post-crisis monetary policy
A working paper from the Minneapolis Fed challenges "the dominant view of monetary policy at major central banks, including the Fed", to keep the policy interest rate at the zero bound when the natural real interest rate is negative.
Liquidity traps and monetary policy: managing a credit crunch, by Francisco Buera and Juan Pablo Nicolini, uses a model with heterogeneous entrepreneurs that face cash-in-advance constraints on purchases and collateral constraints on borrowing. A tightening of the
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