Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244604 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 336
Publisher: 
University of California, Department of Economics, Davis, CA
Abstract: 
Safe asset shortages can expose the economy to liquidity traps. The nature of these traps is determined by the cyclicality of the bond premium. Self-fulfilling liquidity traps are associated with a counter-cyclical bond premium. Small issuances of government debt crowd out private debt and exacerbate these pessimism-driven recessions. In contrast, fundamental liquidity traps arise under a pro-cyclical bond premium and government debt is expansionary. In the data, we find evidence of a counter-cyclical bond premium and a pro-cyclical supply of safe assets. We propose robust policies that prevent the existence of self-fulfilling traps and are expansionary in fundamental traps.
Subjects: 
bond premium
safe assets
liquidity trap
JEL: 
E0
E1
E5
E32
E52
Document Type: 
Working Paper

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