Eiichi Morino 





流動性の罠(りゅうどうせいのわな、liquidity trap)とは、
出典: フリー百科事典『ウィキペディア(Wikipedia)』




It is time for the monetary authorities to jump into the liquidity trap
December 2, 2008
Willem H. Buiter 

The (formerly) advanced industrial countries are all in or 
headed for the liquidity trap ‘lite’.  
This is the situation where the short-term risk-free nominal 
interest rate cannot fall any further.  A ‘heavy’ or ‘deep’ 
liquidity trap occurs when nominal risk-free rates at all maturities
 are at their lower bound(s).

A liquidity trap ‘lite’ may occur even when short-term rates above zero.  
It will certainly occur when the short-term nominal interest rate falls 
to zero.  Unless the monetary authorities are willing and able to tax 
currency holdings, the zero nominal interest rate rate on bank notes sets 
a floor for all short-term nominal interest rates. 
 I have not seen too many central bankers perusing the works of Silvio Gesell, 
so for the time being, I will treat a zero short risk-free nominal interest rate 
as the effective floor for the risk-free nominal interest rate.

If zero is the floor, there is no reason not to go there immediately.  
The recession in the US, the UK, the Eurozone, Japan and the rest of Europe 
is, with probability verging on certainty, going to be so deep and so prolonged,
 that the zero lower bound will be reached even by the most anal-retentive gradualist 
central bank before the middle of 2009.  
So why not get it over with in December 2008 and possibly do some good 
in the mean time?  The required cuts in the official policy rate would be trivial 
in Japan (30 basis points) and in the US (100 basis points - assuming 
the 35 basis points penalty on bank reserves is abolished).  
For the UK, a mere 300 basis points cut and 
for the Euro Area a 325 basis points cut would anchor the official policy rate 
at the floor (again assuming the 25, respectively 50, basis points reserve penalties 
of the Bank of England and the ECB are eliminated).

In all likelihood, cutting the central banks’ official policy rates 
to zero will not provide a major stimulus to financial intermediation and thus 
to aggregate demand.  But even if it doesn’t help,  it certainly won’t hurt.

Dr. Lorenzo Bini Smaghi, Executive Board member of the ECB disagrees.  
He wants to keep some of the ECB’s interest rate powder dry.  
He obviously has watched “They died with their boots on”, or some other movie 
of the battle of Little Big Horn in which George Armstrong Custer and his command 
were outgunned by the Cheyenne, the Lakota and the Arapaho.

The analogy with not firing your last bullet except in extremis is, however, 
not convincing (I used to believe a version of it, but have changed my mind). 
A cut in interest rates does not exhaust its effect on economic activity as soon as 
the cut is implemented.  A short-term, temporary cut has a smaller effect 
than a long-term, more permanent cut.  Cutting earlier means that the cumulative effect 
on activity at any given future date is likely to be larger.  
In George Armstrong Custer terms, once you pull the trigger, the gun keeps in firing.

It is possible that there are complex psychological mechanisms 
(of the kind most economists and central bankers don’t understand)  
that may cause an interest rate cut of a given magnitude to produce 
a greater cumulative effect if it is administered at just the right moment 
- say when an inflationary or deflationary bubble is most likely 
to be punctured or when fears, phobias and bandwagon effects can be influenced 
by some highly visible, even if largely symbolic, policy action.

While I recognise the theoretical possibility that there could be something 
to the ‘keeping (some of) your power dry’  argument,  
I have never seen any empirical evidence that supports it, 
or a rigorous analytical model that lays out the precise mechanism.
 The argument should therefore be dismissed as a constraint 
on actual planned rate cuts.

Once the zero lower bound on the short nominal interest rate is reached, 
the arsenal of the central banks is restricted to quantitative easing 
- the purchase by the central bank of private and public sector securities, 
financed by the issuance of base money.  Such expansions of the balance sheet 
of the central bank can occur as a result of the collateralised lending 
that central banks traditionally engage in at the discount window and in repos.  
It can occur through the collateralised loans extended through the ever-expanding range 
of special facilities created by the Fed, the Bank of England and other central banks.  
Or it can occur through unsecured central bank lending or through outright purchases 
of private or public securities.

This process of quantitative easing can, effectively, go on forever.  
It only stops when the central bank has monetised all private and public securities.  
Even if the risk-free nominal interest rates at all maturities are reduced 
to zero (the deep liquidity trap), the scope 
for quantitative easing is not exhausted, because the central bank has the option 
of acquiring risky private securities of any and all kinds, 
up to and including ordinary equity.

Cutting nominal rates to zero and quantitative easing will not be inflationary 
as long as the virtually unbounded liquidity preference  
of the private sector persists.  
These measures will become inflationary as soon as normalcy returns 
and liquidity is, once again, just viewed as food for the faint-hearted.  
At that point, there has to be a swift reversal of the quantitative easing 
and an increase in short nominal interest rates, sufficient to reduce the real demand 
for base money to a level consistent with the remaining outstanding nominal stock 
at the prevailing price level.  That will be a fun exercise.

My first-best scenario would be for the Fed, the ECB, the Bank of Japan 
and the Bank of England all to set their official policy rates at zero forthwith.  
They won’t do this, regrettably.  The Bank of Japan’s interest decision really 
does not matter - what is 30 basis points among friends?  
The Fed might as well blow what little interest rate elbow room it has left 
in one fell swoop.  Keeping 50 basis points in reserve for a rainy day 
will not impress the Cheyenne, Lakota or Arapaho.

The UK real economy is contracting quite spectacularly across the board.  
The (from a parochial national British perspective) hitherto most welcome weakening 
of sterling is close to the point at which it ceases to be the correction 
of a long-standing overvaluation anomaly and begins to smell of a rout.  
The most recent weakening is quite likely a reflection of the anticipation 
of sharp rate cuts in the near future. 
 That expectation can therefore be validated without risking a collapse of sterling.  
I would therefore recommend a 150 basis points cut on Thursday.  
This is also my expectation. The last 150 basis points cut can, 
if sterling does not collapse in the mean time, be saved for January 2009.

The ECB is behind the curve and in denial about the absence of a liquidity crunch 
in the Euro Area.  The Euro Area economy is, however, less vulnerable than the UK, 
because of the uniquely high indebtedness of the UK household sector 
and the huge size of the UK banking sector’s dodgy balance sheet relative 
to the size of the UK economy.  
I would recommend a 125 basis points cut by the ECB next Thursday, 
but anticipate a mere 75.

Who said central banking was boring?