| Sumario: | The article focuses on the spline estimation of the liquidity trap. In a recent note, economists James Barth, Arthur Kraft and John Kraft (BKK) used spline functions to investigate the empirical existence of the liquidity trap. A liquidity trap consists of a horizontal section of the demand for money function, or at least a horizontal asymptote under the demand for money function, when the interest rate is placed on the vertical axis and money on the horizontal axis. They concluded that, far from rising to infinity as implied by a liquidity trap, the interest elasticity of demand for money falls off dramatically as the interest rate becomes small. While the liquidity trap is still an article of faith in Macroeconomics texts, many monetary economists now doubt its existence. Another economist has found evidence of a positive floor under the demand for money function, using the Generalized Box-Cox (GBC) function. Spline functions are even more flexible than the GBC family, so the BKK approach is a welcome addition to the literature. Unfortunately, BKK have set up their spline function in the wrong way to detect a possible liquidity trap.
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