Can one be a liquidity trap denialist?

Let’s say the central bank targets the (eventual) rate of price
inflation and not the price level itself.  Then even a one-shot burst
of helicopter-drop money induces more consumer spending rather than more money demand.  It was Meyer
Burstein who best explained Patinkin’s "real balance
effect" in terms of weakly dominant game-theoretic strategies.  If you
wait to spend
your money, later prices will be higher, if only with some probability
(thus it matters that the central bank commits to a preferred rate of
forward-looking inflation, rather than restoring the previous price
level; the latter would mean deflationary expectations and
possibly take away the real balance effect).  Nothing in the
Patinkin/Burstein logic requires any particular degree of optimism
about economic conditions.  In fact very pessimistic consumers may be
the most likely to scramble after goods now, again putting the real
balance effect into play and pushing up prices.  Nor is a strongly positive nominal interest rate required for the real balance effect.  Don’t be fooled by
representative agent models which draw a single flat horizontal line
for the return to holding money curve; this is about game theory.

The greater a hoard of cash you are holding, the more likely that
the spending behavior of other consumers will inflict a negative
pecuniary externality on each consumer and thus again the more likely a
real balance effect, following a helicopter drop of money.  Of course with
interdependent strategies there are usually multiple equilibria.  You
can get a "liquidity trap equilibrium" by postulating an adjustment
cost to portfolio decisions, combined with just the right kind of a
trigger strategy equilibrium (everyone holds her new money cautiously, but poised to strike with quick new spending, if need be).  In that sense I am not a pure liquidity trap
denialist although I think such an equilibrium is unlikely.

Here are my previous posts on the liquidity trap.


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