Optimal Monetary Policy in a Liquidity Trap With Heterogeneous Agents

This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation and temporary binding credit constraints.This framework is motivated by recent empirical findings.A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB.The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot.Moreover, an optimal money injection does not avoid the economy being at the ZLB.