Template-Type: ReDIF-Paper 1.0
Author-Name: Sanjay R. Singh
Author-Name-First: Sanjay R.
Author-Name-Last: Singh
Author-Name: Nicolas Caramp
Author-Name-First: Nicolas
Author-Name-Last: Caramp
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Bond Premium Cyclicality and Liquidity Traps
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.
Length: 67
File-URL: https://repec.dss.ucdavis.edu/files/9cHYenvqCEf1wwjoHHWPszGV/bond-cyclicality.pdf
File-Format: application/pdf
Number: 336
Classification-JEL: E0, E1, E5, E32, E52
KeyWords: bond premium, safe assets, liquidity trap
Creation-Date: 20200131
Handle: RePEc:cda:wpaper:336