The Real Balance Effect [report]

Peter Ireland
2001 unpublished
This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences
more » ... nal consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.
doi:10.3386/w8136 fatcat:yw4kjrfyqzbsze2ipu44g42wly