IMF paper finds macro-prudential polices can help prevent liquidity traps
A working paper published by the International Monetary Fund (IMF) today investigates whether macro-prudential policies can help mitigate liquidity traps driven by deleveraging.
In Liquidity trap and excessive leverage, Anton Korinek and Alp Simsek note that when "constrained agents" deleverage, the interest rate needs to fall to encourage the "unconstrained agents" to alleviate any drop in aggregate demand.
If this doesn't happen – perhaps if the interest rate cannot be reduced because of the
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