Working Paper

Scarcity of Safe Assets, Inflation, and the Policy Trap


Abstract: We construct a model in which all consolidated government debt is used in transactions, with money being more widely acceptable. When asset market constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal interest rate. The model reveals some novel perils of Taylor rules.

JEL Classification: E4; E5;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-01-23

Number: 2015-2