BoE paper explores liquidity traps with ‘Hank’ model

Precautionary savings can send economy into deflationary spiral, authors find


New research published by the Bank of England explores how central banks should respond to a liquidity trap when policy is constrained by the zero lower bound.

Dario Bonciani and Joonseok Oh tackle this question using a heterogeneous-agent New Keynesian (Hank) model, featuring workers and firm owners. The workers face the risk of becoming unemployed, and “incomplete markets” mean they cannot fully insure themselves against this possibility. Firm owners, by contrast, do not face this risk.


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